Microsoft’s (MSFT) free cash flow is considered the “most resilient” of the major hyperscalers, BNP Paribas said.
“The Big 5 hyperscalers are now set to spend nearly $700B in capex this year, up ~65% y/y, up from an expectation for ~$550B just a few months ago, and from $150B spent in 2023,” analyst Stefan Slowinski wrote in a note to clients. “As Oracle, and now Alphabet, Amazon and Meta’s [free cash flow] plummet toward negative territory, Microsoft’s [free cash flow] profile appears more resilient (at least for now).”
Slowinski has a $659 price target and Outperform rating on Microsoft.
Delving deeper, Slowinski said despite all the concern about artificial intelligence spending, he expects the company’s free cash flow margins to be around 22% this year, with the other major hyperscalers—Alphabet (GOOG) (GOOGL), Amazon (AMZN), Meta (META) and Oracle (ORCL)—at 5%, or even lower. “As investors grow increasingly concerned about AI spending and eventual ROIC, Microsoft may again be viewed as the more disciplined player,” Slowinski added.
On the flip side, Azure has not seen any acceleration in growth, while Microsoft’s competitors are seeing an acceleration in their core businesses (Amazon AWS, Meta’s advertising, and Alphabet’s search and cloud). Additionally, Google and Amazon have gained ground on Microsoft’s Azure, despite its relationship with OpenAI (OPENAI), Slowinski added.
“Allocating capacity to internal R&D (despite access to OpenAI IP) and to first-party apps (such as Microsoft 365 Copilot with just 15m users) does not appear to fully explain the underperformance,” Slowinski explained. “But we continue to see potential for Azure to see acceleration as capacity comes online.”