On Thursday, Goldman Sachs (NYSE:GS) adjusted its price target on Microsoft Corporation (NASDAQ:MSFT), reducing it to $500 from the previous $515, while maintaining a Buy rating on the tech giant's shares. The firm's decision comes in light of revised free cash flow (FCF) projections and increased capital expenditure (CapEx) estimates for the fiscal years 2026 and 2027, particularly related to artificial intelligence (AI) developments.
The analyst from Goldman Sachs highlighted that despite the price target adjustment, the expectation is for Microsoft to perform strongly, with a projected 14% revenue growth matching the consensus. The Azure cloud segment is anticipated to grow by 33.5% in constant currency terms, surpassing the consensus of 29-30%. Additionally, an earnings per share (EPS) of $3.14 is forecasted, slightly above the consensus of $3.10.
Microsoft's stock has seen an 11 percentage point underperformance compared to the NASDAQ year-to-date, which analysts attribute to investor concerns over the impact of increased AI-related CapEx on gross margins and a quarter of Azure growth that didn't meet expectations.
However, with the expected increase in capacity following the release of Blackwell in November and a clearer picture of interest rates and U.S. election outcomes, there are anticipated tailwinds for Microsoft's earnings in the second fiscal quarter of 2025 and the second half of the fiscal year.
The analyst's confidence in Microsoft's Azure gaining momentum in the second half of fiscal year 2025 is bolstered by discussions at Communacopia with Kevin Scott and insights from a CIO survey, indicating Azure's competitive edge. The report suggests that periods of increased CapEx and margin pressure historically led to short-term underperformance for Microsoft's stock, followed by outperformance with Azure's growth reacceleration.
Despite modeling $2-3 billion in potential losses from OpenAI operations for fiscal years 2025 and 2026, Goldman Sachs sees potential for EPS tailwinds from operational efficiencies as Microsoft's strategic investments mature. The firm acknowledges Microsoft's current valuation at 29 times the calendar year 2025 price-to-earnings ratio, which is a 34% premium over the S&P. Nonetheless, they justify this valuation by pointing out that even in a peak investment year, Microsoft's EPS growth is 3% faster than the S&P's.
In other recent news, the strategic partnership between Microsoft Corp . and Rezolve AI is set to transform the global retail industry. The collaboration integrates Rezolve AI's Brain suite of commerce solutions with Microsoft's Azure cloud platform, aiming to optimize retail operations and enhance customer engagement. Microsoft has pledged substantial Go-to-Market support for Rezolve AI, with initiatives designed to expand the company's market reach and support its goal of surpassing $100 million in annual recurring revenue by 2025.
In the light of recent analyst notes, Oppenheimer has downgraded Microsoft's stock from Outperform to Perform due to concerns over higher-than-expected losses from its OpenAI investment and slower enterprise adoption of AI technology. On the other hand, Truist Securities and BMO Capital Markets have maintained their confidence in Microsoft's performance, reiterating a Buy and Outperform rating respectively.
In the realm of AI, Microsoft has been part of a substantial $4.8 billion investment to expand its artificial intelligence and cloud services infrastructure in northern Italy. Also, the company is part of an agreement with Constellation Energy to support the revival of a unit at the Three Mile Island nuclear plant.
InvestingPro Insights
Microsoft's financial metrics and market position align closely with Goldman Sachs' analysis. According to InvestingPro data, Microsoft's revenue for the last twelve months as of Q4 2024 stood at $245.12 billion, with a robust revenue growth of 15.67%. This growth rate supports Goldman Sachs' projection of 14% revenue growth, indicating Microsoft's consistent performance.
The company's P/E ratio of 35.2 reflects its premium valuation, which Goldman Sachs justifies given Microsoft's faster EPS growth compared to the S&P. An InvestingPro Tip notes that Microsoft is "Trading at a high earnings multiple," corroborating the analyst's view on the company's valuation.
Microsoft's strong market position is further emphasized by another InvestingPro Tip, which identifies it as a "Prominent player in the Software industry." This status supports Goldman Sachs' confidence in Microsoft's competitive edge, particularly in its Azure cloud segment.
For investors seeking more comprehensive insights, InvestingPro offers 14 additional tips on Microsoft, providing a deeper understanding of the company's financial health and market position.
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