Morgan Stanley: AI cloud business profit growth space is broad, reiterates "hold" rating for Microsoft Corporation (MSFT.US)

After meeting with executives from Microsoft Corporation (MSFT.US), Morgan Stanley analyst Keith Weiss believes that the tech giant's Azure division may bring "significant upside". Weiss, who has given Microsoft Corporation a "hold" rating with a target price of $650, said that the recent $25 billion deal with OpenAI paves the way for further growth for Microsoft Corporation. In a report to clients, Weiss wrote, "Based on our framework, analysis, and interpretation of management comments, the gross margin for Azure AI (excluding revenue sharing from OpenAI) may have already reached around 20%." As a result, he has raised his expectations for Azure and believes that the gross margin for Azure's artificial intelligence-related products could reach as high as 30% by fiscal year 2029 (or even higher). Weiss stated, "We believe that the profit margin for Azure AI could exceed 40%, which means significant growth potential in the coming years for our model. Conversations with Microsoft Corporation's management have bolstered our confidence in demand trends, which will support accelerated revenue growth in the first quarter (at fixed exchange rates) and expand operating profit margins. Demand signals for bookings, RPO, and product usage are all faster than we expected. In conclusion, although Microsoft Corporation's stock price is currently valued at 23 times our 2027 fiscal year GAAP EPS estimate (approximately $20.65), the strong demand and potential for further margin improvement shown in the first quarter performance are still severely underestimated, making Microsoft Corporation our top pick among large software stocks." Weiss added, "The growth forecast for Azure is far below the contribution that the OpenAI deal might bring. If the remaining performance obligations can be fully recognized in revenue, this will provide another growth driver for our model."