Microsoft Favored by Jefferies Despite 6.55% YTD Decline

Microsoft Corporation (MSFT) has been recognized as one of the "most favored large-cap stocks" by the investment bank Jefferies. Despite recent underperformance, Jefferies views this as an attractive entry point for investors. The stock has declined by 6.55% year-to-date and over 8% in the past 12 months, with concerns arising from Microsoft's January forecast for its cloud computing business, Azure. However, Jefferies maintains that the fundamentals of Azure and M365 Communication Cloud are robust, contributing 53% to the company's total revenue.

Jefferies analyst Brent Thill highlighted that Azure's growth momentum is driven by AI-driven order backlog growth and Microsoft's continued market share gains from Amazon Web Services (AWS). He also noted that the company's performance guidance has reduced risk. Regarding M365 Communication Cloud, Thill expects Copilot to maintain a strong but gradual adoption rate, becoming increasingly important by the 2026 fiscal year.

Thill also addressed the company's free cash flow (FCF) expectations, which have been compressed by 20% since the fourth quarter of fiscal 2023. However, he anticipates a positive revision to the 2026 fiscal year expectations due to a slowing growth in capital expenditures and increasing AI business revenue. Although Microsoft is expected to continue increasing capital expenditures through the 2026 fiscal year, management forecasts a deceleration in expenditure growth, aligning more closely with revenue growth. By the end of the 2025 fiscal year, AI computing capabilities are projected to better match demand.

In addition to Jefferies, other financial institutions have also expressed optimism about Microsoft. Evercore ISI noted that if software spending slows due to market conditions, Microsoft and Salesforce would remain the most resilient among enterprise suppliers. The Bank of Montreal has given Microsoft an "outperform" rating, partly due to its position in the AI competition.