Analyst revisits Microsoft stock price target after AI reporting change

Updated at 10:03 AM EDT

Microsoft shares edged higher in Thursday trading following the tech giant's move to streamline its quarterly reporting and after a bullish note on the group's cloud prospects from a top Wall Street analyst.

Microsoft ( MSFT ) , which disappointed investors with a muted fourth quarter earnings report and near-term outlook last month, is re-tooling its reporting structure to move some search and ad revenue into its Azure unit, which sits in its Intelligent Cloud division. Voice-based technology services, as well as some other AI-related revenue, will move to its Productivity and Business Processes division, which houses Microsoft 365.

The tech giant said the changes mean Azure "now more closely aligns to consumption business" during an investor presentation late Wednesday.

It also restated current-quarter revenue outlooks for both Productivity and Business Processes and Intelligent Cloud, with the former now forecast at between $27.6 billion and $28 billion and the latter to between $23.8 billion and $24.1 billion.

Collectively, the moves were seen as a way for Microsoft to both highlight the contributions that AI-related technologies are making across its broader business while justifying the billions in capital spending it has planned for the coming years.

Azure, Microsoft's flagship cloud offering, saw revenue rise 29% over the fourth quarter, modestly shy of Wall Street's 30% growth forecast, although it noted that around 8 percentage points of Azure growth came from AI investments, larger than the 7 percentage point boost from the prior quarter.

Capital spending for Microsoft's fiscal fourth quarter rose 77.6% from the year-earlier period to $19 billion, well ahead of the $14 billion tallied over the three months ended in March, taking the full-year total to $55.7 billion.

Microsoft cautious on Azure

The group's annual 10-K filing with the Securities and Exchange Commission indicated Microsoft would likely spend around $35 billion on data-center construction costs, with most coming in the current fiscal year, The total is more than double the $13.5 billion tally from the prior fiscal year.

Microsoft, which normally guides investors on a quarterly basis, said Azure growth would accelerate over its fiscal second half, which ends next June, with growth for the three months ending in September similar to that of the previous quarter.

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Citigroup analyst Tyler Radke said the updates were "more extensive than in the past" and will increase revenue for the group's Productivity and Business Processes unit at the expense of Intelligent Cloud and More Personal Computing.

"While the changes are mechanical in nature and total revenue/operating income/earnings per share are unchanged, they do suggest more stability in the Azure consumption business (Q4 growth of 35% year over year CC is consistent with Q3) vs. the 1-point deceleration in the prior approach," Radke and his team said.

Radke, who reiterated his buy rating and $500 price target for Microsoft, also noted the cautious nature of the overhaul, which matched its quarterly revenue guidance from July.

Azure to accelerate in 2025

"We were surprised by the apparent conservatism of the Azure consumption guide of a similar 1-point to 2-point growth deceleration, despite the benefit of the removal of the slowing per-user business and [finance chief Amy Hood's] commentary around similar consumption trends in 1H as Q4 (where Azure consumption growth was stable," Radke said.

Hood told investors on July 30 that Azure revenue would "continue to be driven by our consumption business, inclusive of AI, which is growing faster than total Azure."

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"We expect the consumption trends from Q4 to continue through the first half of the year. This includes both AI demand impacted by capacity constraints and non-AI growth trends similar to June," Hood said.

"In [the second half of our fiscal year] we expect Azure growth to accelerate as our capital investments create an increase in available AI capacity to serve more of the growing demand," she added

Microsoft shares were marked 0.3% higher in early Thursday trading to change hands at $425.54, a move would leave the stock with a year-to-date gain of around 13%.

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