Microsoft (MSFT) faces negative investor sentiment due to concerns about gross margins, capital expenditures, artificial intelligence monetization, and its OpenAI relationship, Morgan Stanley said in an earnings preview on Thursday.
But despite short-term supply constraints in AI infrastructure, Microsoft’s ability to deliver steady core Azure consumption puts it in a positive setup for outperformance in the upcoming quarters, the analysts said.
“We expect to see modest upside in F1Q outperformance, but see the larger lever for stock outperformance being greater investor confidence in the F2H Azure acceleration,” Morgan Stanley said.
The firm said investors have reduced their expectations for Microsoft 365 Copilot due to limited financial visibility and competitive pressures. However, it is showing positive signs of adoption and is viewed as a potential multi-year driver for average revenue per user expansion.
Morgan Stanley expects the company’s capital expenditures to remain high as they are aligned with future growth in Azure AI services and potential volatility in spending could “introduce some volatility for the stock.”
Rising investments in AI and losses related to OpenAI will weigh on short-term earnings but the company’s expense discipline can moderate the impact on operating margins, the firm added.
Microsoft’s valuation discount compared to its large-cap software peers is unjustified given the company’s leadership in GenAI, adaptable business model and upside potential in margins and estimate revisions, according to the preview.
Morgan Stanley reiterated its outperform rating on Microsoft’s stock and kept the price target at $506.