With Microsoft's Strong Quarter, We're Raising Our Price Target
Here's why profit generation should continue to grow.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
* Following Microsoft’s March quarter results, we are lifting our price target on Microsoft shares to $480 from $450.
Last night, Microsoft’s MSFT March quarter results cleared consensus expectations with revenue from its Intelligent Cloud segment up 20% year over year to 43% of overall revenue.
Leading that business, which is Microsoft’s largest revenue and profit generator, was the 31% revenue gain compared to the year-ago quarter for Azure. Similar to our comments about margin improvement at Alphabet, we are seeing the same with Microsoft’s Intelligent Cloud segment, which posted operating margins of almost 47% in the quarter vs. 42.9% in the year-ago quarter.
With AI adoption accelerating cloud adoption and prospects for Integrated Cloud margins to remain at elevated levels, profit generation at Microsoft should continue to grow. That is leading us to lift our MSFT price target to $480 from $450. As the shares contend with a wave of price target increases today, we’ll hold off revising our Two rating for now. Should we see the shares move back below the $400 level, it would be a reason to up our rating.
Outside of Microsoft’s cloud business, its Personal Computing segment should improve near-term and accelerate further as the expected AI-on-device upgrade cycle unfolds.
During the earnings call, management rattled off a litany of metrics relating to Copilot be it for the number of organizations it’s now available to, the number of companies using it, or program partners. We continue to see this driving Office 365 and related revenue at the company, something that is likely to accelerate further as PC vendors bring AI PCs to market. That should drive some incremental margin gains at the segment as should the ongoing integration of Activision Blizzard.
Wrapping up Microsoft’s quarter showcased the opportunities and positive impacts to come from AI and cloud but also the improving outlook for its other businesses. Also, like Alphabet, Microsoft’s focus on costs is allowing it to deliver those results even as its capital spending hit $14 billion during the March quarter.
That level of spending per management is expected to “increase materially on a sequential basis driven by cloud and AI infrastructure investments.” That could mean a slower pace of further margin improvement in the near term, but we see this more as Microsoft investing for revenue opportunities ahead.
That spending also bodes well for our holdings in Nvidia NVDA and Marvell MRVL, especially given Intel’s INTC comment that its AI and data center capacity is constrained.
At the time of publication, TheStreet Pro Portfolio was long MSFT, NVDA, MRVL.
