Microsoft Favored by Jefferies Despite 6.55% YTD Decline

Microsoft Corporation (MSFT.US) 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 buying opportunity. The stock has declined by 6.55% year-to-date and over 8% in the past 12 months. Microsoft's January forecast for its third-quarter cloud computing business, Azure, raised concerns. However, Jefferies believes that the fundamentals of Azure and M365 Communication Cloud are robust, with these two businesses accounting for 53% of 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 more significant by the 2026 fiscal year.

Thill also mentioned that while free cash flow (FCF) expectations have been compressed by 20% since the fourth quarter of fiscal 2023, he anticipates a positive revision to the 2026 fiscal year expectations. This is due to a slowing in capital expenditure growth and increasing AI business revenue. Although Microsoft will continue to increase capital expenditures in the 2026 fiscal year, management expects the growth rate to moderate and align more closely with revenue growth. By the end of the 2025 fiscal year, AI computing capabilities are expected to better match demand.

In addition to Jefferies, other financial institutions also have a positive outlook on Microsoft. Evercore ISI noted that if software spending slows due to market conditions, Microsoft and Salesforce (CRM.US) would remain the most resilient among enterprise suppliers. The Canadian Imperial Bank of Commerce has given Microsoft an "outperform" rating, partly due to its position in the AI competition.