Microsoft Upgraded as Analyst Sees Steady Margins Even Without Heavy AI Model Spending

Microsoft Corp (NASDAQ:MSFT) can likely generate mid-to-upper teens revenue growth, driven by cloud infrastructure, generative AI deployment, and enterprise software expansion, according to Stifel. The Microsoft Analyst: Analyst Brad Reback upgraded the rating from Hold to Buy, while lifting the price target from $530 to $575. The Microsoft Thesis: Stable operating margins and strong cash flows "should limit the company’s need for outside financing," Reback said in the upgrade note. Check out other analyst stock ratings. He highlighted the following drivers: Azure and Cloud Growth Acceleration: Despite capacity concerns, Azure accelerated during the June quarter. Improved stack efficiencies reduced hardware deployment times by more than 50%, which enables faster monetization. There is Azure revenue upside, supported by capacity monetization and growing OpenAI usage and revenue share, the analyst stated. M365 Commercial and Copilot Expansion: M365 Copilot reached around 30 million seats in the fourth quarter, growing 10 million sequentially, Reback noted. This was "driven by product improvements over the last several quarters that gave customers the confidence to move proof-of-concept work into full scale deployments," he wrote. The analyst noted that Microsoft’s ability to sustain healthy M365 ARPU (average revenue per user) gains in coming years is supported by: Progress in M365 Copilot A growing portfolio of M365 products (WorkIQ, CoWork, future Super App), which "should generate incremental consumption revenue overtime." The inclusion of the GitHub business, which has begun to benefit from its new consumption model. Margin Stability and Efficiency Gains: Operating margins are expected to remain stable, supported by optimized spending, disciplined capital allocation, and reduced internal LLM R&D costs, the analyst stated. "As open-weight models are increasingly delivering outcomes that only modestly trail frontier models, at a fraction of the cost, Microsoft’s need to aggressively invest in its own LLM offering is likely abating," he further wrote. MSFT Stock Price Activity: Microsoft shares are trading higher by 0.46% at $500.30 at the time of publication on Wednesday, according to Benzinga Pro data. Read Also: AI Boom Is ‘Dot-Com and Subprime All Merged in One,’ Former Fidelity Manager Tells Steve Eisman Photo: Tada Images on Shutterstock.com