Microsoft (MSFT) stock ain't cheap but AI story 'has barely played-out': UBS

Ahead of Microsoft's (NASDAQ: MSFT) upcoming 4Q earnings report, UBS analysts highlighted three main discussion points in a note Friday: Azure's potential upside from AI and core demand, capital expenditure trends, and the growth trajectory of Office 365.

The analysts maintained a Buy rating and $520 per share target on Microsoft, emphasizing that the company's involvement in AI is a major driver of its future growth.

"The read-through from the Google Cloud results was positive, as was our meeting with rival/partner CoreWeave last week. CoreWeave's revenue and backlog growth trajectory is outstanding and with Microsoft as a major customer, we view this as a positive for AI infra demand," UBS wrote.

The note highlights that investor expectations for Azure's growth appear attainable.

"Bottom line, the investor bogeys for 4Q/Jun actual c/c Azure growth of 32% and guide for 30% in 1Q/Sept seem doable," UBS stated. Additionally, the firm raised its FY25 capital expenditure estimate to $73 billion, aligning with the buy-side consensus of $70-75 billion.

On the Office 365 front, UBS sees limited upside for 4Q/Jun growth, trimming their ex-Copilot estimate due to weak seat growth signals. However, they suggest that Copilot could provide an upside surprise by 2Q/Dec 2024.

Despite recent stock fluctuations, UBS views Microsoft's valuation as justified. "The stock isn't cheap at 38x CY25 FCF but, in our view, is justified by 15%+ EPS growth in FY25 and a compelling AI story that has barely played out," UBS added.

The investment bank underscored the significance of Microsoft's leverage in the AI sector, projecting robust EPS growth and maintaining a price target of $520 based on a CY25 FCF multiple of 47x.

In conclusion, UBS remains bullish on Microsoft, driven by its promising AI prospects and strong fundamentals despite the high valuation and tight IT budget backdrop.

By Sam Boughedda

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