Microsoft Corp. MSFT remains a top pick for Goldman Sachs, which sees significant upside in the company's stock.

In a client note released Wednesday, equity analyst Kash Rangan described Microsoft as "one of the most compelling investment opportunities" in the tech space, citing its robust position across the cloud stack and growing momentum in artificial intelligence (AI).

The investment bank maintained its Buy rating on the stock, setting a 12-month price target of $500. This projection suggests a 20% upside from Microsoft’s current price levels, driven by anticipated growth across its cloud and AI offerings.

Microsoft Positioned For Long-Term Secular Trends

Rangan emphasized Microsoft’s dominant presence across the entire cloud stack, from applications to infrastructure.

“With a strong presence across all layers of the cloud stack, Microsoft is well-positioned, in our view, to capitalize on a number of long-term secular trends, such as Gen-AI, public cloud consumption, SaaS adoption, and digital transformation,” Rangan stated.

He highlighted these trends could drive sustainable growth, supported by Microsoft's ability to integrate its services seamlessly across its ecosystem.

Microsoft already built a competitive edge in the generative AI market through its Azure cloud platform.

According to Rangan, AI workloads are growing more complex, with 93% of use cases relying on three or more model providers. Microsoft's efforts to mitigate these challenges, including the development of custom chips and advanced hardware, position it as a leader in the AI infrastructure space.

Azure Innovations and Adoption Drive Growth

Goldman Sachs sees Azure's custom silicon as a game changer in tackling the increasing demand for AI processing power. "Azure's custom chips extend GPU architecture and alleviate capacity constraints," Rangan stated.

Key innovations such as Azure Cobalt — delivering a 50% improvement in price performance — and Azure Boost DPU — cutting server power usage by threefold while quadrupling performance — offer a strong value proposition.

Azure AI services are also gaining traction, with offerings like the AI Foundry (currently in preview), AI Agent Service (coming soon), and Copilot Studio (already used by over 100,000 organizations).

Usage of Azure OpenAI Services has doubled in just six months, which, according to Rangan, demonstrates customers' growing ability to deploy real-world AI applications.

Stock Struggles While Azure Deceleration

Despite Microsoft's strong innovation pipeline, its stock has underperformed the Nasdaq by eight percentage points since reporting fiscal fourth-quarter 2024 results. Slowing Azure growth has weighed on investor sentiment.

Yet, Rangan expects Azure's reacceleration in fiscal third-quarter 2025 to serve as the next major catalyst for the stock rebound.

Microsoft's commercial Office offerings also provide a significant growth lever. The analyst indicated that the platform boasts over 400 million commercial users, representing less than 50% of the global knowledge workforce, suggesting further expansion potential.

Expansive TAM and Secular Tailwinds

According to the investment bank, Microsoft stands out due to its expansive total addressable market (TAM) and the company's ability to capitalize on secular tailwinds like cloud adoption and digital transformation.

“While MSFT competes with a number of best-of-breed and platform providers across various layers of the tech stack, we believe the company's breadth of offerings and large installed base position the company to expand its share of wallet within customers' IT budgets,” Rangan wrote.

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