Microsoft Likely To Beat 4Q Driven by Generative AI, Azure Growth Presents Potential Risks, Analysts Say

Morgan Stanley analyst Keith Weiss maintained an Overweight rating on Microsoft Corp MSFT and a price target of $415 on the stock.

Weiss highlights that heading into the 4Q print, the onus for MSFT now shifts from building the positive narrative around Generative AI to seeing proof points that this innovation will translate into upward momentum in the fundamentals. 

With his current model forecasting revenues and EPS 3% and 5% ahead of consensus in FY24, and 10% for FY25, Keith sees a strong potential for Microsoft to deliver the goods. 

Given that the company is still in the early stages of this innovation cycle, investors correctly assume that this fundamental momentum will likely build through FY24, leaving buy-side expectations reasonable for 4Q and the forward quarter guide, in his view. 

He thinks that investors are looking for signals that the rate of spending optimization is beginning to lessen as the secular catalyst of increased AI workloads and pricing uplifts loom on the other side of cyclical impacts. 

Guggenheim analyst John Difucci reiterated Microsoft with a Sell and a $232 price target. Microsoft is likely to exceed consensus expectations for 4Q23 and provide at least in-line guidance for 1Q24.

Windows numbers suggest even worse trends than the challenging reality, while Office will benefit from several tailwinds.

Azure's growth presents some risk, but AI and potential accounting windfall related to Cloud optimization efforts could benefit the numbers.

The focus on generative AI, Microsoft 365 Copilot pricing, and FY24 Capex will likely impact the narrative and stock more than current numbers.

Microsoft will likely discuss the ability to grow in low double digits with potential upside due to AI benefits.

The impact on margins from running AI workloads remains uncertain.

Azure revenue guidance implies a stretch for growth in the current macro environment, but AI workload contribution and potential accounting recognition may help.

FY24 Capex estimates are likely to increase significantly, with expectations approaching $50 billion. 

While the PC market remains sluggish, preliminary estimates suggest better growth prospects for Windows in 4Q23.

Office 365 Commercial revenue growth will likely accelerate in 4Q23, driven by easier comps. 1Q24 and FY24 consensus revenue growth for Office also seems reasonable.

Price Actions: MSFT shares traded lower by 1.52% at $349.76 on the last check Thursday.