Morgan Stanley Cuts Microsoft Target Price 11% Amid Demand Concerns

Morgan Stanley has lowered its target price for microsoft corporation (MSFT.US) from $530 to $472, while keeping its "overweight" rating. This adjustment is due to ongoing demand concerns and negative investor sentiment, which have led to a downward revision of market expectations for Microsoft's performance. Despite these short-term challenges, morgan stanley continues to view microsoft as a long-term winner in the generative artificial intelligence (GenAI) sector, citing its attractive valuation.

The firm's report highlights significant macroeconomic uncertainty, which has prompted a reduction in Microsoft's performance forecasts. Specifically, Morgan Stanley has lowered its estimates for Azure's year-over-year growth for the third and fourth quarters from 31.5% and 32% to 31% and 30%, respectively. Additionally, the growth estimates for Microsoft 365 commercial cloud services have been reduced from 14% and 13% to 13.5% and 12% for the same periods. This marks the second consecutive downward revision, reflecting the macroeconomic uncertainties and mixed survey results.

Morgan Stanley acknowledges that short-term demand headwinds have dominated investor discussions but have not yet fully materialized in market consensus. The firm anticipates that near-term market expectations for Microsoft will be adjusted downward. However, Morgan Stanley remains confident in Microsoft's overall positioning, suggesting that its stock price may be nearing a valuation bottom, offering an attractive long-term risk-reward profile.

According to Morgan Stanley's Chief Information Officer (CIO) survey, Microsoft's leadership in the GenAI sector remains relatively unchanged. Thirty-five percent of CIOs expect Microsoft to capture the largest incremental market share by 2025. Among the 30% of CIOs who have not yet started deploying AI projects, there is a preference for leveraging large-scale cloud service providers like AWS, Azure, and GCP. In emerging fields such as AI agents, Microsoft is widely recognized for its strategic advantage, particularly with Microsoft 365 Copilot, which lays the groundwork for future agent-based workflows.

Furthermore, Morgan Stanley believes that Microsoft is well-positioned within its investment cycle. Based on management comments and the firm's analysis, Microsoft's capital expenditures may decrease, potentially driving free cash flow growth to exceed expectations. For every 1% reduction in capital expenditures, free cash flow is estimated to increase by approximately 1.5%.