Investing.com -- Citi analysts believe investors should consider buying Microsoft (NASDAQ:MSFT) shares following the recent pullback, citing an upside potential for the coming quarters.
The lagging performance in the tech giant’s shares comes as investors “struggle to rationalize enormous ramps” in capital expenditure (capex) and slower-than-expected growth in Azure services and earnings per share (EPS), analysts said in a Wednesday note.
Citi analyzed the sales input and surveys from Microsoft resellers and Chief Information Officers (CIOs), which indicated a general sense of stability during the September quarter.
“Survey showed healthy reseller quota achievement levels (strongest YTD) despite some moderation in growth expectations,” analysts noted.
“Qualitative inputs from customers and partners intra-Q were a bit more mixed, but did highlight some larger M365 CoPilot deals, though overall large deal velocity was more muted.”
The firm believes that the second fiscal quarter results could modestly exceed investor expectations, which have been moderated recently.
It emphasizes that the lower-than-usual expectations for Microsoft could provide a "clearing event" that might allow for modest beats in key performance indicators, especially in Azure consumption.
Analysts expect Microsoft to maintain its full-year double-digit growth targets and to provide commentary on strong capital expenditure.
While the guidance for Q2 might be roughly in line with expectations, limiting positive estimate revisions, the Wall Street firm predicts that the setup post-Q1 could become more tactically interesting.
“We are buyers of the pullback in shares as we expect investor sentiment to turn more positive post-Q ahead of a 2H reacceleration in Azure growth and EPS growth,” analysts wrote.
They also updated their model to reflect changes in Microsoft's financial reporting segments for fiscal year 2025.
The firm took this opportunity to reassess its estimates, factoring in a demand/CIO survey that suggested a constrained spending environment as the year-end approaches. As a result, Citi has slightly lowered its near-term estimates, including a reduction in Office 365 Commercial growth projections by approximately 2 percentage points for fiscal year 2027.
On the other hand, the bank's revenue and EPS forecasts for fiscal years 2026 and 2027 remain slightly above consensus.