CLSA Initiates Microsoft at Outperform, $535 PT

CLSA analyst Bhavtosh Vajpayee initiated coverage of Microsoft (NASDAQ: MSFT) with an Outperform rating and a $535 price target.

“Microsoft is no stranger to being written off. Despite an established dominance in office productivity software, it has struggled to own the AI rollout into the cubicle.

Its dependence on OpenAI and Anthropic and the lack of a self-grown AI model grate, especially when said partners make efforts to connect to enterprises directly.

Copilot seems to lack in features and imagination- these are all valid reasons for disappointment.

But it is also a fact that Microsoft has the Azure cloud growing at near 40%, and excluding Azure, the rest of the business can still expand at a 10% clip annually.

That, on Microsoft’s vintage and scale, should be a reminder that enterprise tech’s ubiquitous force can make a triumphant return again.

20m paying Copilot users contend with 450m paying Office users – the play is vast on the upside.

The AI build, in our view, is just starting, and we are not ready to write off Microsoft’s enterprise distribution in a rush. Valuations are undemanding at 21x NTM GAAP PE.

With some efforts, Copilot has a shot at becoming the window to AI for enterprise users – adoption is already rising.

This supports our view that a re-rating may be hoped for and backs our Outperform call on the stock.

Even with target PE assumed at one standard deviation below 5-year average, we get a target price of US$535 on 25x Dec 2027CL normalised earnings.

In our view, a 50-year old company growing revenues and earnings in the high teens deserves a mid-20s PE.

We use the five-year mean because this period contains the 2022 correction in tech and is more representative across market sentiment cycles.”

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