Microsoft's "Undervalued" Asset: Morgan Stanley Expects the IT Giant's Stock to Soar 50%

Morgan Stanley analyst Adam Wood has initiated coverage of Microsoft shares with an “Overweight” rating and a price target of $600, according to MarketWatch. This target implies a 51% increase in the company’s stock price from its July 21 closing level. Wood cites the IT giant’s Azure cloud service and Copilot AI assistant as the main future catalysts for the stock’s performance; the analyst believes the market is underestimating their impact on Microsoft’s business.

Microsoft has recently faced challenges in convincing investors of the success of its AI strategy, notes MarketWatch. Seeking Alpha points out that the company’s capital expenditures on AI are expected to total approximately $190 billion this year — with these investments, Microsoft hopes to gradually transition from generating revenue through software subscriptions to monetizing AI usage across its entire ecosystem. However, market participants remain skeptical about the tech giant’s transformation: since the beginning of the year, Microsoft’s stock has fallen by about 15%.

However, according to Adam Wood, the market is fundamentally mistaken in its assessment of the company’s key initiatives. In his view, Microsoft’s cloud service—Azure—and the company’s AI assistant Copilot, which is integrated into applications such as Word, Excel, PowerPoint, Outlook, and Teams—are becoming “the clearest indicators” that Microsoft’s investments in AI are already leading to “sustainable value creation.” It is precisely these services that Wood cites as “key drivers of the company’s stock growth.”

— Using Azure as an example, the analyst believes the IT giant is demonstrating its ability to monetize demand for AI infrastructure. Wood notes that investors mistakenly view Microsoft’s cloud division as a typical provider of basic computing power, from which they purchase only resources for inference (the generation of responses to user queries by neural networks). The market is overlooking the synergistic effect: Azure drives demand for Microsoft’s entire portfolio, generating cross-sales of the company’s more profitable software products.

— As for Copilot, investors are “increasingly underestimating” the revenue potential embedded in Microsoft’s pricing model, according to Wood. The analyst describes the growth in average revenue per user (ARPU) driven by Copilot as a “three-pronged engine.” It is driven by the company’s ability to increase the number of paid licenses, customers’ migration to the flagship Microsoft 365 E7 AI ecosystem subscriptions, and the launch of pay-as-you-go pricing.

"While the monetization model used to be tied to user growth and license renewals, with the introduction of Copilot, Microsoft now has the opportunity to monetize both users and their level of activity," Wood emphasizes.

“As AI adoption scales within organizations and customers increasingly use AI agents, reasoning capabilities, and workflow automation, Copilot and the capabilities of the [Microsoft] E7 segment (a bundled license for Copilot and Agent 365’s AI agents—OnInvest note) could become one of the most significant drivers of ARPU growth in Microsoft’s history,” the analyst concludes.

Gil Luria, an analyst at D.A. Davidson, points to another factor that is strengthening Microsoft’s position. According to his observations, the corporate sector is increasingly realizing that it does not want to work directly with leading AI labs, such as OpenAI or Anthropic—in part due to the latter’s complicated history with U.S. authorities, MarketWatch notes. “The solution is becoming clear: companies need a tool that allows them to flexibly switch AI models without risking their processes,” Luria noted in a client note this month.

The analyst attributes this role to Copilot, which acts as an intermediary layer between various AI models. “Although investors might have viewed Copilot as a standalone AI model, it already functions as a service that helps route queries and tasks to the most appropriate tool,” the strategist noted. Luria explains that, using Copilot, users can “select models themselves, decide whether to access internal data, and choose the right agent—or let Copilot route the prompt in the most efficient and appropriate way.”

In premarket trading on July 22, Microsoft shares are up 0.2%. Since hitting their last local low on June 25, they have risen 13%.

The Wall Street consensus on the company’s stock is “Buy”—61 out of 64 analysts covering Microsoft shares have issued this recommendation. Only three recommend holding. There are no “Sell” recommendations for the IT giant’s stock.

This article was AI-translated and verified by a human editor