Despite delivering year-to-date gains of 38%, it hasn’t all been smooth sailing recently for Microsoft (NASDAQ:MSFT). Shares fell after the June quarter earnings release in July, partly on fears of decelerating cloud growth and a disappointing revenue guide. Additionally, investors have been cautious due to the company’s substantial investments in AI infrastructure in anticipation of upcoming product releases. To illustrate, Microsoft’s 10-K filing revealed a year-over-year increase of $22 billion in purchase commitments.
However, Piper Sandler analyst Brett Bracelin advises investors to consider the bigger picture. More specifically, looking ahead to the rest of the year, the analyst warns investors to “not sleep on” a recovery for the non-cloud business in the December quarter.
Bracelin highlights the fact his bullish thesis on Microsoft has been supported by the significant shift towards a cloud-based model in the past ten years. Nonetheless, he advises against overlooking the non-cloud segments, which generated $100 billion in revenue last year. These segments may seem less exciting, but they could still play a significant role in shaping the company’s growth prospects for the December quarter.
As such, even taking into account little to no improvement in Microsoft Cloud (53% of sales) in the face of “optimization headwinds,” driven by a non-cloud recovery (representing 47% of sales), Bracelin sees the “potential for MSFT to guide to a slight improvement in core growth” in the December quarter.
Furthermore, the additional feedback received on AI tool Copilot during the Envision London event on October 18th, solidifies Bracelin’s “bullish view” that Microsoft is in a strong position to leverage its first-mover advantage in AI. “We recommend large-cap growth investors add to MSFT positions ahead of the M365 Copilot GA release on November 1st marking the next stage of a promising AI journey,” the analyst summed up.
As such, Bracelin has named MSFT his ‘highest conviction idea into year-end,’ rating the stock as Overweight (i.e. Buy) with a $400 price target. This implies ~21% upside from current levels for investors. (To watch Bracelin’s track record, click here)
Overall, the Street is coming down with the bulls on Microsoft shares. MSFT has 36 recent analyst reviews, breaking down 32 to 4 in favor of Buys over Holds for a Strong Buy consensus rating. The $398.28 average target closely resembles Bracelin’s objective. (See Microsoft stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.