Microsoft's AI Revenue Set To Surpass $10 Billion: Piper Sandler Maintains Overweight Rating

Microsoft Corp. MSFT cloud computing platform Azure's workloads could push its artificial intelligence revenue to $10 billion as it is the world’s largest cloud franchise with a first-mover advantage in generative AI, said Piper Sandler in its note dated Jan. 28.

What Happened: Piper Sandler’s senior research analyst Brent Bracelin, based on his sum-of-the-parts analysis approach maintained an ‘overweight’ rating with a price target price of $520 apiece, representing a 19.66% upside from its current price level of $434.57, as of Monday's close.

The Analyst Takeaways: Azure has been the primary driver of Microsoft’s growth, consistently delivering double-digit revenue growth in constant currency over the past seven years. Azure, which generated $12.6 billion in revenue in fiscal year 2020, surpassed the $50 billion annual revenue run rate in September 2023 and is projected to exceed the $100 billion run rate by March 2026.

The analyst also believes that short-term challenges, including currency headwinds, OpenAI losses, and significant investments in AI infrastructure, may temporarily pressure earnings per share and free cash flow growth.

Piper Sandler advises large-cap growth investors to maintain a long-term perspective. These elevated investments are crucial for building a strong foundation for future growth, according to them.

Moreover, the emergence of a rapidly expanding Microsoft AI business, generating over $10 billion in revenue and demonstrating triple-digit growth, underscores the company’s significant long-term earnings potential.

Other Key Focus Areas As Per Piper Sandler:

Massive Capex: AI infrastructure race could elevate Capex+Lease to over $80 billion in fiscal 2025

FX Headwinds: Currency fluctuations may impact revenue by approximately 200 basis points.

OpenAI Losses: Expect a potential EPS impact of $0.16-$0.25 per quarter.

Project Stargate: Expect AI training efficiency with intellectual property rights until 2030.

Why It Matters: Azure is a cloud computing platform, while OpenAI is a research lab that develops AI models. Azure OpenAI is a partnership between Microsoft and OpenAI that provides access to OpenAI’s models through Azure.

OpenAI is the lead partner for the private-sector-funded project Stargate, announced by President Donald Trump, last week. It has operational responsibility for the project.

Also, the emergence of Chinese AI firm DeepSeek's R1 model, described as a ChatGPT killer, has outperformed OpenAI with significantly lower costs. But DeepSeek's impact is yet to be completely analyzed.

MSFT will report its second-quarter results on Jan. 29.

Price Action: Microsoft's stock was up 0.51% in the premarket trading, whereas, the exchange-traded fund tracking Nasdaq 100, Invesco QQQ Trust, Series 1 QQQ was up 0.54%.

MSFT has a consensus ‘buy' with a price target of $510.74, according to the 32 analysts tracked by Benzinga. The high target is $600, and the low is $465. Recent ratings by Piper Sandler, Morgan Stanley, and Cantor Fitzgerald suggest a $523 target, implying a 20.35% upside.