Microsoft (NASDAQ:MSFT) was in the spotlight on Friday as Morgan Stanley elevated the software giant to its Top Pick in the software space.
Shares rose 0.8% in premarket trading.
“Questions around the evolving relationship w/ OpenAI, durability of Azure growth, and health of its Productivity apps given Agentic computing have weighed on shares,” Morgan Stanley analyst Keith Weiss wrote in a note to clients. “Confidence in a path to shedding those weights and a broadening set of growth drivers elevates MSFT to Top Pick.” Weiss also upped his price target to $625 from $582 and reiterated his Overweight rating on shares.
Delving deeper, Weiss noted that while investors have had concerns about its relationship with OpenAI, the fact that the ChatGPT maker is looking elsewhere (its recent $300B deal with Oracle as an example) is not a negative for Microsoft.
“In our view, the contract signing should be viewed as an incrementally positive data point for Microsoft,” Weiss wrote in a note to clients. “From the viewpoint of Microsoft looking to profit maximize within a resource constrained environment, we see Microsoft looking to manage their allocation of GPUs and limited capacity of Powered Data Center Shells more toward their Enterprise customers.”
Additionally, there have been some concerns that Azure growth may be slowing with OpenAI looking elsewhere, but that also is not the case, as Azure is more than just generative AI, Weiss explained.
“Our capex-implied Azure AI Revenue suggests significant upside to our Azure forecasts. Our capex model sizes the implied contribution from Azure AI based on the capital expenditures dedicated to AI-related initiatives,” Weiss added.
Lastly, recent survey work shows that Microsoft’s productivity apps have “durable” mind and market share and Microsoft’s ability to improve has been proven time and time again.
“Net, we understand concerns, but think the data and survey-work supports a view underpinning durability of growth,” Weiss added. “Double-digit growth + opex discipline + share repurchases + dividend yield a durable high-teens total return profile, underpriced at current levels.”