As the artificial intelligence (AI) revolution continues in full force, Microsoft (MSFT) stands out within the “Magnificent 7” group of tech giants, well-prepared to capitalize on this transformative technology. Analysts at Jefferies recently reiterated their confidence in this company, highlighting its strong position in the AI space.

With a robust outlook on AI’s potential to drive future growth, Jefferies has set an ambitious price target for Microsoft, suggesting a solid 32% upside from current levels, pegging the target at $550. This bullish stance is rooted in Microsoft’s strategic investments in AI and its deep integration across its product suite, which are expected to yield substantial returns. 

In this article, we’ll dive deeper into why Microsoft is poised for significant upside potential.

About Microsoft Stock

With a massive market capitalization of $3.11 trillion, Microsoft (MSFT) remains a dominant force in the technology sector, boasting a diverse portfolio spanning software, cloud computing, AI, gaming, and hardware. Notably, MSFT is among the pioneers targeting the AI market through its partnership and substantial investments in OpenAI.

Shares of the Redmond-based tech giant have gained 10.5% on a year-to-date basis, lagging behind the broader market and its main competitors in the AI market.

Should Investors Be Worried About Microsoft’s Massive Expenditures on Artificial Intelligence?  

MSFT investors have raised concerns about the return on investment from the company’s substantial spending on artificial intelligence. However, both management and a number of Wall Street analysts are confident in its long-term potential.

For example, Jefferies analysts, led by Brent Thill, said in a recent note, “The ROI on AI Capex continues to be the number one question from investors. MSFT feels it has more conviction in this cycle than it had in the Cloud due to its leading position in AI whereas it was behind AWS in the Cloud.”

The company is witnessing increased adoption of its Microsoft 365 Copilot across industries, as customers use it to drive real business value, with Microsoft 365 Copilot Commercial usage doubling quarter-over-quarter in the first quarter of fiscal 2025. 

During the FQ1 earnings call, management said that Vodafone plans to deploy Microsoft 365 Copilot to 68,000 employees following a trial that demonstrated an average time savings of three hours per person per week. Also, UBS will deploy 50,000 seats in the company’s largest finserve deal to date. More importantly, MSFT continues to observe enterprise customers returning to purchase more seats. Notably, M365 Commercial Cloud growth increased by 16% during the first fiscal quarter and is projected to grow an additional 14% in FQ2.

“MSFT notes that the cost structure for AI remains higher today,” Thill said. “Management remains conscious of the monetization strategy and will continue to monitor the LT margin profile of AI products. While it did not provide specifics, they are optimistic about AI’s LT margin profile, highlighting its accelerating demand, a significant amount of IP, and momentum in both first- and third-party distribution.”

Jefferies also pointed out that Microsoft plans to increase its capital expenditures over the next few years as AI becomes more widespread. The firm noted that even if AI does not succeed as expected, Microsoft still has 340 data centers that can be repurposed for other products.

Meanwhile, at the Ignite conference this week, Microsoft introduced a wide array of new artificial intelligence-powered tools and platforms. Moreover, CEO Satya Nadella noted that AI investments are progressing much more rapidly than those in the Cloud. 

“What happened in the Cloud over 10 years is happening with AI in a compressed period, maybe half the time,” Nadella said.

The company unveiled the Azure AI Foundry, the Windows 365 Link, new data processing and security chips, new AI agents, and SQL Server 2025. It also showcased Microsoft Purview, which offers AI-powered data governance, among dozens of other new offerings.

“Our checks have continued to highlight data governance and access as key barriers to widespread rollouts of Copilot, with many companies leveraging MSFT Purview to ensure proper governance of M365 Copilot,” Thill said in a Wednesday note on the conference.

Jefferies reiterated MSFT stock as a “Top AI Pick” with a Buy rating and an ambitious price target of $550, indicating a potential upside of about 32% from current levels.

More News for MSFT Stock

On Nov. 15, The Verge’s Tom Warren reported that some of Microsoft’s leading customers for its Azure OpenAI service include Adobe (ADBE) and Meta (META). Both companies spent over $1 million on AI services in September alone, placing them among the top 10 customers, the report said.

On Nov. 14, the Financial Times reported that the U.S. Federal Trade Commission is set to initiate an investigation into Microsoft's cloud computing business. The probe will examine allegations that the company is abusing its dominance in productivity software by imposing restrictive licensing terms that hinder customers from transferring their data from Azure to competing platforms, according to the report.

Microsoft Dips Despite Upbeat FQ1 Results 

On Oct. 30, Microsoft posted strong FQ1 results, with both top and bottom lines beating estimates. Its revenue grew 16% year-over-year to $65.6 billion, topping Wall Street’s estimates by $1.03 billion. Earnings per share also saw a 10% year-over-year increase to $3.30, surpassing estimates by $0.19. The company’s cloud business remained a key growth driver, with Microsoft Cloud revenue totaling $38.9 billion, a 22% increase year-over-year. This reflects the company’s growing market share in the cloud. Despite a 2-point drop in the cloud’s gross margin percentage due to higher AI infrastructure costs, Microsoft’s gross margin dollars increased by 13%. This indicates that while expanding AI infrastructure has temporarily decreased margins, the overall cloud segment remains a significant source of revenue and profits.

Let’s shift our attention back to Azure. Azure and other cloud services revenue increased by 33%, surpassing estimates of 29.4%. During the quarter, MSFT experienced an increase in both the number of Azure contracts worth over $10 million and those exceeding $100 million. The adoption of AI across Azure could lead to more opportunities for higher-value and longer-term contracts. AI services contributed approximately 12 percentage points to Azure’s growth last quarter. 

Consequently, the company’s significant investment in AI could considerably boost its revenue, with its AI business poised to exceed a $10 billion annual revenue run rate in FQ2. As a reminder, Microsoft’s capital expenditures, including finance leases, were $20 billion last quarter. The majority of this expenditure is allocated towards cloud and AI infrastructure, including AI servers, CPUs, and GPUs.

However, the company’s forecast for Azure cloud growth in the current quarter fell short of investor expectations, resulting in a post-earnings decline of about 6% in MSFT stock. During the earnings call, management stated that FQ2 revenue from the closely monitored Azure cloud-computing business is expected to increase by 31% to 32% in constant currency (CC), a decrease from 34% in FQ1. Responding to a question about the drop from 34% growth in the first quarter to the low 30s, CFO Amy Hood explained, “In Q1, the 34% in CC, as we talked about, that upside versus the 33% that we had guided to was primarily due to some revenue recognition benefits. And so, I think about that on a sort of a pure consumption basis and AI as being 33%.”

Meanwhile, Citi recently said Microsoft is focusing on enhancing cost efficiencies across its various divisions and re-accelerating growth in its crucial Azure unit. 

“We walked away feeling that management had good confidence in the 2H Azure reacceleration and ramping supply of capacity, which should ease current constraints,” Citi analyst Tyler Radke wrote in a note to clients, following a meeting with Microsoft’s investor relations team and several division CFOs. Radke said that Microsoft expressed confidence in Azure’s acceleration during the second half of the fiscal year, attributing this to the shift of third-party capacity from the second to the third quarters and an increase in first-party capacity.

Analysts tracking Microsoft anticipate that the company will continue its growth trajectory in fiscal 2025, with its EPS and revenue expected to increase by 9.66% and 13.72% year-over-year to $12.94 and $278.76 billion, respectively. 

MSFT Stock Valuation and Shareholder Returns

Microsoft returned $9.0 billion to shareholders through dividends and share repurchases in the first fiscal quarter. It offers an annualized dividend of $3.32 per share, backed by 19 consecutive years of growth, translating into a forward yield of 0.79%.

Assessing Microsoft’s valuation, the stock currently trades at 31.90 times the consensus earnings estimate for FY25, well above the sector median of 24.36x but roughly in line with its five-year average of 31.62x. Also, its forward-adjusted PEG ratio of 2.42 exceeds the sector median by more than 30%. Given this, its valuation premium implies that the company has a limited margin for error.

Options Market Sentiment on Microsoft Stock 

Examining the January 17, 2025, option chain, the $415.00 call option shows a bid/ask spread of $14.30/$15.85, and the $415.00 put option has a spread of $11.95/$12.30. Note that this is the options strike closest to the stock’s current price. We can now calculate the expected price movement by using the midpoint prices of these options:

12.13 (415.00 put) + 15.08 (415.00 call) = 27.21/415.49 = 6.5%

Based on current prices, the options market indicates that MSFT stock could move up or down approximately 7% from the $415.00 strike price by the January options expiration using the long straddle strategy. That would place the stock in a trading range of about $388.50 to $442.20.

Notably, the ratio of open calls to open puts at the $415.00 strike price is about 1.41 to 1, with 5,721 open calls compared to 4,060 open puts. Moreover, at the next strike price of $420.00, open call options outnumber open put options by 1.85 to 1. 

This difference suggests that more traders in the options market are bullish on MSFT stock, implying that the stock might continue to rise in the upcoming months.

What Do Analysts Expect For MSFT Stock?

Microsoft stock has a consensus “Strong Buy” rating on Wall Street. Among the 40 analysts covering the stock, 34 recommend a “Strong Buy,” three suggest a “Moderate Buy,” and three assign a “Hold” rating. The average price target for MSFT stock is $504.45. Although this target is somewhat more conservative than the forecast from Jefferies, it still indicates an upside potential of 21.4% from current levels.