The artificial intelligence opportunity and recent underperformance of Microsoft make it hard to stay on the sidelines, UBS said. Analyst Karl Keirstead upgraded the technology stock to buy from neutral and raised his price target by $55 to $400. Keirstead’s price target implies an upside of 16.7%. “We upgrade Microsoft shares to Buy from Neutral on evidence that Azure/AWS cloud infrastructure spend is beginning to stabilize after a significant deceleration over the past year,” he said in a note to clients Thursday. “We believe this, coupled with near-term AI catalysts as well as the material underperformance in the stock since May 1st, make the set up too attractive to maintain a neutral view of the stock.” Keirstead downgraded Microsoft early in the year, arguing that spending trends for cloud programs such as Azure and Amazon Web Services were going downhill. He argued that Azure’s decline, in the case of Microsoft, could weigh on the stock. Now, he said that Azure is still in a tough environment but is no longer considered to be deteriorating with the worth potentially all in the past. Keirstead raised estimates for the cloud business starting with the fourth fiscal quarter, which will be reported later this month. AI could also help improve Azure revenue growth and exceed company guidance, he said. Elsewhere, Keirstead pointed to the “Copilot” feature as another example of how AI can help the business, with Keirstead noting an announcement on monetization could be coming. Microsoft has rallied nearly 43% this year, outperforming the broader market. But despite the strong rally on the surface, Keirstead noted the stock’s performance since May 1 (up about 12%) is around in line with large-cap peers and actually worse than the average peer’s advance in that time frame. MSFT YTD mountain Microsoft Meanwhile, the company trades at a higher valuation than the broader peer group, though Keirstead said the company deserves the higher ratio due to its exposure to AI and the potential for 2024 to bring higher capital expenditure intensity. Keirstead’s upgrade brings him into the majority on Wall Street, as more than four out of every five analysts holding buy ratings on the stock, according to Refinitiv. Shares rose 1.5% in Friday premarket trading. — CNBC’s Michael Bloom contributed to this report.
