TD Cowen Reiterates Buy on Microsoft, $540 Price Target

TD Cowen analyst Derrick Wood reiterated a Buy rating and $540.00 price target on Microsoft (NASDAQ: MSFT).

“Muted Reaction On Print, Likely Due To Capex, But Growth Overhangs Are Lifting; Azure growth of 39% cc was in line w/ buyside, but guide above driven by new inference efficiencies & faster capacity on-boarding.

Copilot adoption kicked into a new gear & is set to drive strengthening M365 growth.

We think overhangs on Azure & Copilot momentum are lifting & should lead to a better path for shares, though higher capex & FCF contraction may temper some NT enthusiasm. Maintain Buy.

On topline, we view this qtr as a turning point as 1) Copilot adoption is finally inflecting; 2) we have visibility into multiple qtrs of modest Azure growth acceleration & 3) MSFT’s capex does not appear to be directed to building its own frontier models (it will continue to lean on OpenAI IP as MSFT is now guaranteed royalty-free access through 2032).

We do however think some of this positivity may be offset by a weakening FCF margin profile as we now model capex moving from ~31% of revs in FY25 to ~64% in FY27E.

This likely explains the muted stock reaction, but growth overhangs are dissipating and MSFT is proving that its AI initiatives (AI ARR hit $37b, ~17% of total Cloud revs) are kicking into a new gear.

At a ~20x CY27E P/E, maintain Buy.”

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