Microsoft's Potential In Gaming Business Unveiled, Analyst Sees Durable Growth

BMO Capital Markets analyst Keith Bachman reiterated the Outperform rating on Microsoft Corporation MSFT, raising the forecast to $465 from $455.

Per the analyst, Microsoft’s valuation is reasonable on an EV/FCF and P/E basis, but not inexpensive. 

The analyst writes that AI can help support longer-term growth, and the durable growth opportunities warrant a premium valuation.

Microsoft is well positioned in the gaming market, particularly since leading content and scale are sources of competitive advantage. In the December quarter, gaming generated 11% of total revenues.

While gaming is inherently a lumpy business, the company can grow gaming revenues above gaming market growth rates, the analyst adds. Bachman raised the forecast given increased conviction in the tech behemoth’s consolidated durable growth potential.

The analyst notes that Microsoft’s leading titles, development and distribution scale, and broader industry trends can help drive roughly double-digit sustained gaming growth in the long term.

Content is increasingly important for long-term success, and Activision Blizzard adds numerous leading titles.

However, the analyst flags some limitations to the company’s gaming growth due fewer title launches and modest organic Game Pass growth. Thus, the analyst lowered FY25 Gaming revenue growth estimate to 10% y/y CC from 13% year over year. 

However, Bachman raised FY25 Windows revenue growth estimate to 7% year over year.

Price Action: MSFT shares are trading lower by 1.59% to $420.98 on the last check Friday. 

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