Morgan Stanley On Microsoft Ahead Of Q1: Optimistic on AI Future Despite Early Innovation Cycle

Morgan Stanley analyst Keith Weiss remained Overweight on Microsoft Corp MSFT with a price target of $415.

The analyst holds firm conviction in the significant opportunity ahead of Microsoft within Generative AI and the company's strong positioning to execute that opportunity. 

However, investors must consider the timing of enterprise adoption cycles in setting expectations for upcoming results. With Microsoft 365 Copilot going into general availability on November 1, he thinks investors are unlikely to hear much validation of the pent-up demand for the solution from this conservative management team, and investors must be understanding of enterprise adoption cycles when assessing generative AI impacts in Azure.

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Keith points out that Microsoft is still in the early stages of this innovation cycle, and fundamental momentum is likely to build through FY24. After a disappointing June quarter print, he sees buy-side expectations becoming more reasonable for 1Q. 

Given indications of persistent Cloud optimization and mixed channel checks, he notes that investors now look for constant currency Azure growth of 26% - 27% versus management's 1Q Azure guidance for 25% - 26% cc growth, with an Azure growth guidance for 2Q expected to point to further stabilization in the rate of deceleration at 25% - 26% cc growth.

He expects a reiteration of management expectations for flat YoY operating margins, ignoring Activision for FY24, but highlights his expectation for a meaningful headwind to GAAP margins and EPS with Activision despite positioning for EPS accretion from the deal on a non-GAAP basis. 

Overall, Microsoft continues to trade at a discount to large-cap software peers and underprices the return to a durable high-teens total return profile.

Loop Capital analyst Yun Kim initiated coverage on Microsoft with a Buy rating and a price target of $425.

Price Action: MSFT shares traded lower by 0.18% at $332.03 on the last check Tuesday.