Bank of America raised its price target for Microsoft (NASDAQ:MSFT) stock to $510 from $480 in a note Wednesday, citing robust performance in the company's Azure cloud services and early traction with its new Copilot feature.
"Channel commentary [is] consistent with a healthy Q3," notes analysts, with most Microsoft partners tracking above or in line with expectations ahead of the Q2FY24 results, which will be reported on July 30.
The report highlights sustained Azure strength, forecasting a year-over-year growth of 31.5% for Azure, with an 8% contribution from AI workloads.
This exceeds the initial estimate of 30.5% growth. The firm expects $100 million in upside to their Productivity and Business Processes (PBP) segment revenue estimate, driven by modest Commercial Office gains and strong premium E3/E5 cycles.
Office 365's performance is also noted as a significant contributor to Microsoft's growth. Analysts anticipate a continuation of the "sustained strength in the premium E5 cycle," along with early success in Copilot upsell deals.
They foresee the Office segment driving higher-than-expected growth, particularly as Copilot gains more traction.
For the More Personal Computing (MPC) segment, analysts predict a $50 million upside to their $15.5 billion estimate, supported by IDC's preliminary report of 3% year-over-year PC shipment growth, surpassing the forecasted 2%.
Despite some concerns about incremental traction, analysts are optimistic about Copilot's potential, with four out of ten partners citing it as a revenue growth driver in Q4. This aligns with the base case for a 1.7% penetration rate into the eligible E3/E5 base, and they project the Office business could achieve 20% growth by Q1FY26 in an upside scenario.
Bank of America reiterates its Buy rating for Microsoft, stating its new target reflects "potential for upward revision to FY25 Office growth." The firm values Microsoft at 46 times the estimated FY25 free cash flow, highlighting the strong growth outlook driven by Azure and Office 365.