Microsoft remains confident in AI investments over long term: Jefferies

Microsoft (NASDAQ:MSFT) investors have expressed concerns regarding the return on investment from the company’s massive expenditures on artificial intelligence, but management remains confident in its long-term potential.

“The ROI on AI Capex continues to be the number one question from investors,” said Jefferies analysts, led by Brent Thill, in an investor note. “MSFT feels it has more conviction in this cycle than it had in Cloud due to its leading position in AI whereas it was behind AWS (AMZN) in Cloud. We believe these investments will pay off, but it will be a LT journey, not an immediate impact.”

Microsoft 365 Copilot Commercial adoption and usage is outpacing expectations. Usage doubled quarter over quarter during the first quarter of fiscal 2025. What’s more, M365 Commercial Cloud growth expanded 16% during the first quarter and is expected to increase by another 14% during the quarter in progress.

“MSFT notes that the cost structure for AI remains higher today,” Thill said. “Management remains conscious of the monetization strategy and will continue to monitor the LT margin profile of AI products. While it did not provide specifics, they are optimistic about AI’s LT margin profile, highlighting its accelerating demand, significant amount of IP, and momentum in both first- and third-party distribution.”

Jefferies also noted Microsoft intends to increase capex over the next few years as AI becomes more widespread. Even if AI inexplicably fails, Microsoft still has 340 data centers which are re-usable for other products.

Interestingly, Microsoft has a contractually exclusive relationship with the startup sensation OpenAI. This means OpenAI can rent hardware from other providers, but it requires permission from Microsoft to do so.

Jefferies maintains its Buy rating on Microsoft and a hefty price target of $550, which is nearly 30% more than its current value.