Bank of America Securities analyst Bradley Sills reiterated a Buy rating on Microsoft Corp (NASDAQ:MSFT) with a price target of $510.
Sills noted that Microsoft is well positioned to generate sustained low double-digit growth over the next 3-5 years, led by continued use of the Azure cloud infrastructure platform, the cloud-based Office 365 productivity suite and more profitable Games and Game Pass revenue in Xbox.
While a revenue mix shift towards lower-margin Azure and O365 segments is likely to offset economies of scale in the near term, the analyst said operating cost scale is likely to drive a steady 50bps annual margin expansion in the coming years.
Read also: Apple Pay expands Buy Now, Pay Later with Affirm, adds support for third-party browsers and more
Most of Sills’ partners are suggesting solid inline or better financial results for Q1 2025. As such, the analyst expects 0%-1% upside to his Q1 revenue estimate of $64.7 billion (+14% year-over-year) , +11% year-over-year organic), driven by steady workload migration to Azure and upgrade momentum in the Office Premium E3 and E5 cycle, somewhat offset by PC and Windows softness.
Sills’ commentary with partners suggests an inline migration of workloads to Azure, led by cloud migration and augmented AI. The analyst noted that security remained an area of strength.
He would look for upside Azure growth of 33%-34% year-over-year under restated metrics (with 12% points from AI) versus his base of 33% (11%).
Sills’ estimate for M365 copilot revenue remains modest at $275 million. For More Personal Computing, he expects a largely inline result with his estimate of $12.5 billion (+12% y/y).
The analyst pointed out that the stock is +10.4% year-to-date, driven by enthusiasm for AI-led growth in Azure and Office. However, the shares have lagged recently due to concerns about rampant investment and limited visibility on respective investment returns.
According to Sills, the stock trades at 32 times calendar year 2026 free cash flow, which isn’t a stretch given the sustainability of low-to-mid-30s Azure growth, low-mid-teens office growth and long-term scale on capex.
The analyst will look for more expansions as he approaches the expected second half of the Azure re-acceleration in 2026.
Sills expected first-quarter revenue of $64.42 billion.
The $510 price target is based on an EV/FCF multiple of 40 times calendar year 2026 FCF or 1.9 times adjusted for low 20s growth, a premium to the software GARP group of 1.5 times for growth durability.
Price action: MSFT stock is down 0.01% at $416.05 as of last check on Thursday.
Read also:
Image via Shutterstock
Latest ratings for MSFT
|
Date |
Fixed |
Action |
From |
To |
|---|---|---|---|---|
|
February 2022 |
Tigress Financial |
Maintainer |
Buy |
|
|
January 2022 |
Citigroup |
Maintainer |
Buy |
|
|
January 2022 |
Morgan Stanley |
Maintainer |
Obese |
See more analyst ratings for MSFT
See the latest analyst ratings
Up Next: Transform your trading with Benzinga Edge’s unique market trading ideas and tools. Click now to access unique insights which can put you ahead in today’s competitive market.
Get the latest stock analysis from Benzinga?
This article Microsoft Azure, Office 365 and Gaming To Drive Low Double Digit Growth: Analyst originally appeared on Benzinga.com
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.