Microsoft and IBM: The AI Infrastructure Race and Why Their Stocks Are Undervalued

The AI revolution is reshaping enterprise technology spending, with cloud platforms and specialized tools becoming the backbone of corporate innovation. Among the leaders, Microsoft (MSFT) and IBM (IBM) stand out for their strategic advantages in the AI infrastructure race. Despite recent gains, their stock prices still understate the long-term opportunities unlocked by their cloud platforms (Azure, IBM Cloud), AI partnerships, quantum computing, and hybrid systems. This article argues that both companies are undervalued relative to their growth potential and that investors should buy now ahead of earnings catalysts.

Microsoft: Azure's Dominance and the OpenAI Advantage

Microsoft's Azure cloud platform has become the de facto engine for AI development, thanks to its deep integration with OpenAI's models (including GPT-4). This partnership, highlighted by analysts at Bernstein and Wedbush, is driving Azure's revenue growth. For example, Azure's enterprise AI workloads surged 35% in Q1 2025, far outpacing the broader cloud market.

Analysts now see Azure's AI-driven revenue hitting $100 billion by 2027, a figure that justifies Microsoft's consensus price target of $531 (9% upside from its June 2025 close of $486). Yet, the stock trades at a 14% discount to this target, even as OpenAI's tools become critical for enterprises.

IBM: Quantum Computing and Hybrid AI Leadership

While often overlooked, IBM's hybrid cloud strategy and quantum computing advancements position it uniquely in the AI race. Its IBM Cloud now supports hybrid AI environments, allowing companies to run AI workloads across private and public clouds—a must-have for regulated industries like finance and healthcare.

IBM's quantum computing roadmap, aiming to build a fault-tolerant 1,000+ qubit system by 2030, is another differentiator. This tech could revolutionize drug discovery, logistics, and encryption, creating recurring revenue streams.

IBM's AI software suite, including tools for responsible AI governance, has also attracted enterprise clients. Wedbush recently raised its price target to $325 (12% upside from its June 2025 close of $289.18), citing these structural shifts.

Valuation Gaps and Analyst Upside

Both stocks are undervalued relative to their growth trajectories:

• Microsoft: Analysts project 14% annual EPS growth over the next three years, yet its P/E ratio of 29 is lower than peers like Amazon (AWS). The consensus target implies a $45 billion valuation uplift for Azure alone.
• IBM: Despite a 33% YTD gain in 2025, its P/E of 49 is justified by its AI and quantum R&D. The $325 target reflects a 15% premium to current levels, with 12% of its revenue now AI-driven—up from 8% in 2023.

Catalysts on the Horizon

Investors should watch for two near-term catalysts:

1. Microsoft's Q2 2025 Earnings (July 2025): A beat on Azure's AI revenue could push shares toward $500.
2. IBM's Quantum Computing Milestones: Delivering a 433-qubit system (expected Q3 2025) would validate its roadmap and attract institutional buyers.

Investment Recommendation

Buy both stocks now, with a preference for IBM on a risk-adjusted basis.

• Microsoft: A core holding for its AI infrastructure dominance. Target $530 by end-2025.
• IBM: A higher-beta play on quantum and hybrid AI. Target $325 by early 2026.

Risks: Overvaluation if AI adoption slows, or competitive threats from AWS or Google Cloud.

Conclusion

The AI infrastructure race is a multi-decade opportunity, and Microsoft and IBM are among the few companies with both the scale and innovation to capitalize. Their stocks may be volatile in the short term, but the structural shift in enterprise spending toward AI tools ensures long-term upside. With analyst targets rising and earnings catalysts imminent, now is the time to position for this trend.

Act now—before the market fully prices in their AI potential.