Microsoft stock has barely budged since this summer when it posted impressive earnings and a solid revenue outlook for its flagship Azure cloud business. One Wall Street analyst thinks that's about to change.
Microsoft, the world's second-largest stock by market value, has trailed its megacap tech peers notably this quarter, rising less than 4%.
And it's up only about 0.5% since its fiscal fourth-quarter earnings, reported on July 30. And that's despite forecasting that Azure cloud revenue would keep climbing firmly from a record high of $75 billion and promising it would spend a record $30 billion on AI-related investments.
Google parent Alphabet, on the other hand, has surged a staggering 45% this quarter and topped a $3 trillion market cap for the first time last week. Its June-quarter earnings were solid, but the bigger boost for performance came from a federal court ruling this month that effectively prevented its breakup.
Melius Research analyst Ben Reitzes, however, thinks the tide could be turning for Microsoft as it heads into next month's fiscal first quarter update and its showcase tech event in November.
"Google has deserved its rally, but Microsoft still deserves a meaningful premium [its forward 12-month price-to-earnings ratio]," Reitzes wrote on Monday.
Reitzes' current PE ratio for Microsoft is 28 times, based on a $22.06 forecast for its fiscal year ending in June 2028. For Google, his PE ratio is 23 times, based on an $11.12 estimate for earnings in the calendar year ending in December 2027.
Microsoft has a larger cloud business and fatter operating profit margins, Reitzes said. He also thinks Microsoft's ability to monetize its AI agent Copilot is underappreciated, given its place in the Office product suite.
"Checks for Azure are showing no slowdown and Microsoft should make some compelling announcements around agents and Copilot at its Ignite conference," said the analyst, who carries a $625 price target on Microsoft stock. His Google price target is $255.
Reitzes also argues that Microsoft's relationship with OpenAI, which is now transitioning into a for-profit entity, is a key growth driver.
"This relationship not only drives enormous inference workloads onto Azure but also gives Microsoft a share of OpenAI's revenue while allowing it to sell OpenAI models directly through Azure AI services," he said.
Reitzes also notes that while Google's Gemini chatbot is gaining ground against OpenAI's ChatGPT and notched 450 million monthly users last quarter, its search business "isn't out of the woods."
"It isn't clear how AI is driving Search and even if AI is driving some of the search volume," he said, noting that AI overviews are reducing the click-through rate on paid ad links.
"If sentiment on search sours again as it has in the past, the relative performance of Microsoft could improve on the drop of a dime since its business is considered much more stable," he added.
Comments