Microsoft Shares Go From Laggard to Leader as AI Growth Improves
(Bloomberg) -- After languishing for months, Microsoft Corp. shares are back within striking distance of a record high amid signs that performance in its Azure cloud-computing business is back on track.
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The software giant's shares are about 2% shy of the record reached last July, with their 16% advance in May putting them on track for the best month in more than three years. The rally has been fueled by the broader rebound in US equities, as well as better-than-expected results from Azure, which investors are betting will continue as artificial intelligence drives more business.
'AI is becoming a bigger and bigger component of those revenues,' said Nancy Tengler, chief executive officer at Laffer Tengler Investments. 'I do think it's a sustainer.'
The strength in Microsoft shares is a stark reversal from last year, when concerns about its position in the AI race and disappointing Azure growth weighed on the stock. Microsoft's 12% advance in 2024 made it the worst performer among the so-called Magnificent Seven stocks, which also includes Apple Inc., Nvidia Corp., Alphabet Inc., Amazon.com Inc., Meta Platforms Inc. and Tesla Inc.
This year, Microsoft's 9% advance has outperformed all of those peers save for Meta, which is up 10%. In addition to benefiting from limited exposure to President Donald Trump's tariffs, Microsoft emerged as one of the biggest winners from a mostly strong earnings season for Big Tech.
The Redmond, Washington-based company reported revenue and profit in its fiscal third quarter that beat Wall Street estimates. Azure was the standout, with revenue growth of 33% exceeding expectations.
Azure's sales include both AI services — the computing power that backs OpenAI's ChatGPT and similar tools — and other products like databases and on-demand storage. Microsoft Chief Financial Officer Amy Hood said last month that it was those non-AI businesses that outperformed expectations in the most recent quarter.
This week, TD Cowen analysts led by Derrick Wood projected that AI-related Azure revenue would rise to about $24 billion in the 2026 fiscal year, from roughly $4 billion in fiscal 2024. The analysts, who have a buy rating on the stock, raised their price target to $540 from $490, implying a potential gain of about 18% from Wednesday's closing price. Of the 72 analysts tracked by Bloomberg that cover Microsoft, only 6 have hold ratings and none recommend selling.
'A return to Azure upside trends and firmer growth in the mid-30% level should help drive a stronger narrative around Azure and greater fund flows back into MSFT,' TD Cowen analysts wrote on Tuesday, referring to the company by its ticker symbol.
At 30 times profits projected over the next 12 months, Microsoft is priced at a premium to the Nasdaq 100 Index and its own 10-year average, both of which sit around 26 times, according to data compiled by Bloomberg.
In the past week, Microsoft has traded sideways, which Tengler sees as a sign that the shares don't have much more near-term upside.
On the other hand, Kevin Walkush, a portfolio manager at Jensen Investment Management, expects the stock to continue moving higher, amid indications that the company will generate a growing share of revenue from AI services.
'Microsoft is probably one of the best long opportunities in AI,' said Walkush, whose firm, like Tengler's, owns the stock. 'Players like Microsoft tend to profit and do very well because they can kind of monetize the ongoing activity pretty continuously and tend to be very high margin.'
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Nvidia Corp. Chief Executive Officer Jensen Huang soothed investor fears about a China slowdown by delivering a solid sales forecast, saying that the AI computing market is still poised for 'exponential growth.'
Salesforce Inc. raised its annual sales forecast, suggesting that its AI agent product is on a path to contribute significant revenue.
HP Inc.'s profit outlook fell short of estimates and it cut the annual earnings forecast, pointing toward a weaker economy and continuing costs from US tariffs on goods from China.
The Trump administration is moving to restrict the sale of chip design software to China, people familiar with the matter said, as the US government evaluates a broader policy announcement on the issue.
DeepSeek said it has upgraded the R1 artificial intelligence model that helped propel the Chinese startup to global prominence at the start of this year.
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--With assistance from Subrat Patnaik.
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