Investing.com -- Piper Sandler believes Microsoft (NASDAQ:MSFT)'s upcoming earnings report on October 30 could be "mixed," citing challenges stemming from new key performance indicator (KPI) metrics introduced in August.
The shift in reporting, particularly within Azure, could create "optical headwinds" that have not been fully factored into Street estimates, according to the analysts.
The report highlights that Azure Infrastructure-as-a-Service (IaaS) revenue is now projected to be "20%+ lower" due to the removal of Enterprise Mobility & Security (EMS) from the segment.
Despite this, Azure is expected to exit the quarter with a growth rate of 34%, though the pace of growth could moderate.
"After pulling EMS out, our updated Azure F2024 forecast now stands 20%+ lower at $57.5B, representing 23% of sales (vs. 31% prior)," Piper Sandler wrote.
In the AI space, Piper Sandler remains bullish, forecasting that Microsoft's AI revenue could exceed $10 billion by fiscal 2025.
While the adoption of Microsoft's Copilot has experienced some early challenges, the firm sees continued momentum at OpenAI, which is growing at a "triple-digit trajectory."
The analysts slightly reduced their growth and EPS forecasts, lowering their fiscal 2025 growth estimate from 13.4% to 12.3% and fiscal 2026 from 14.1% to 12.6%.
They cited concerns around the sustainability of seat-based growth in Microsoft's Productivity and Business Processes (PBP) segment, which generates over $100 billion annually.
Piper Sandler cut Microsoft's price target to $470 from $485, explaining that "Q1 results and guidance could be sloppier than normal" given the changes to KPI reporting.
However, the firm maintained its Overweight rating on the stock, stating, "Microsoft remains well positioned with a first-mover advantage in AI" and strong cash flows of $115-$120 billion per year to fund growth and shareholder returns.