On Thursday, DA Davidson adjusted its outlook on Microsoft Corporation (NASDAQ:MSFT), reducing the price target to $425 from the previous $475 while maintaining a Neutral rating on the stock. This revision follows the release of Microsoft's first-quarter fiscal year 2025 earnings, which highlighted a slowdown in the growth of its Azure cloud services. The firm anticipates this deceleration to persist into the next quarter.
The reported earnings revealed that while Azure AI Services' contribution to Azure's overall growth had increased, the growth from non-AI segments of Azure had seen a slight decline. Despite the current slowdown, the demand for AI technology is burgeoning, surpassing the available supply. DA Davidson noted the expectation of growth acceleration in the latter half of the fiscal year, as Microsoft is set to expand its infrastructure.
The analyst from DA Davidson pointed out the mixed results within Microsoft's cloud business. The increased reliance on Azure AI Services indicates a shift in the company's growth drivers within the cloud sector. However, the decrease in non-AI related growth suggests a broader deceleration in other areas of the cloud business.
Microsoft's management has also acknowledged the trend of decelerating growth in Azure, and they are preparing for this to continue into the following quarter. The tech giant's strategy includes a focus on scaling up its infrastructure to meet the growing demand for AI services.
The price target adjustment reflects the firm's cautious stance on Microsoft's near-term growth prospects, especially in the context of Azure's performance. DA Davidson's maintained Neutral rating indicates a wait-and-see approach, as the market watches for Microsoft's next moves in response to the evolving demand for cloud and AI services.
In other recent news, Microsoft Corporation delivered a notable financial performance, exceeding Wall Street's revenue expectations with a 16% rise to $65.6 billion. The increase is attributed to the expansion of its data center capacity and a surge in demand for AI technologies. However, the company's second-quarter guidance fell short of analyst expectations, largely due to new capacity constraints related to a collocation partner, which could potentially slow Azure's growth.
Despite these constraints, Citi maintains a Buy rating on Microsoft with a $497 target, while Barclays (LON:BARC) reiterated its Overweight rating with a $475 target. Both firms expect a potential re-acceleration in Azure's growth in the second half of the year. Jefferies also reaffirmed its Buy rating, projecting around 33% year-over-year growth for Azure.
Recent developments indicate a significant increase in AI investments by tech giants like Microsoft and Meta (NASDAQ:META). Microsoft's capital spending rose by 5.3% to $20 billion in the first fiscal quarter, surpassing its entire annual expenditure up until fiscal 2020. However, these increased investments have sparked concerns among investors, primarily due to the potential impact on future margins.
Furthermore, Microsoft, along with other major companies like Meta and Alphabet (NASDAQ:GOOGL), reported increased costs associated with AI, causing some investor apprehension. Despite these concerns, the companies emphasized the early stage of the AI cycle and the long-term potential of AI technology.
InvestingPro Insights
Microsoft's recent financial performance and market position offer additional context to DA Davidson's analysis. According to InvestingPro data, Microsoft boasts a substantial market capitalization of $3.22 trillion, underlining its position as a tech industry heavyweight. The company's P/E ratio of 36.65 suggests that investors are willing to pay a premium for its shares, reflecting confidence in future growth prospects despite the recent Azure slowdown.
InvestingPro Tips highlight Microsoft's strong financial health and consistent performance. The company has raised its dividend for 19 consecutive years, demonstrating a commitment to shareholder returns. This is particularly noteworthy given the current focus on Azure's growth deceleration. Additionally, Microsoft's cash flows sufficiently cover interest payments, indicating a solid financial foundation that could support continued investment in AI and cloud infrastructure.
While DA Davidson has adjusted its price target, it's worth noting that Microsoft's revenue growth remains robust at 15.67% over the last twelve months. This, coupled with a high gross profit margin of 69.76%, suggests that the company maintains strong profitability even as it navigates the evolving cloud and AI landscape.
For investors seeking a more comprehensive analysis, InvestingPro offers 14 additional tips on Microsoft, providing deeper insights into the company's financial health and market position.
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