Microsoft keeps Overweight rating at Wells Fargo ahead of earnings

Wells Fargo maintained its Overweight rating on Microsoft (NASDAQ:MSFT) and kept its $515 price target on the stock, ahead of the company's fiscal first quarter results later this month.

Analysts led by Michael Turrin noted that Microsoft's first quarter results are somewhat tough to predict, given the company's significant intra-quarter model reset. However, stronger-than-usual checks suggest underlying Azure momentum continuing and Wells Fargo expects shares to benefit as more model clarity surfaces through fiscal 2025, the analysts added.

The analysts said that their checks for Azure are positive for both core and AI. Most partners finished above plan for Azure in the fiscal first quarter, with stable to slightly accelerating growth. Partners saw healthy new workload activity including cloud migration and modernization projects, strong platform as a service, or PaaS, uptake, and continued generative AI, or GenAI, workload leadership, while optimizations remain balanced. Despite healthy demand, the analysts agree that capacity could remain a constraint on near-term GenAI contributions.

Microsoft Office is in-line, while Copilot adoption is gradually stepping ahead, according to the analysts. Partners were mostly in-line for Office, as usual upgrade motion remains a vital growth driver, offsetting seat headwinds linked to headcount reductions. Feedback on Copilot was more positive than last quarter, however, adoption remains in its early days, the analysts added.

The analysts continue to see Copilot's rollout as slow by design to build trust — and while likely a meaningful multi-year Average Revenue Per User, or ARPU, driver — it is not moving the needle yet.

Turrin and his team noted that model setup is admittedly tough to call after a material change to disclosures intra-quarter (limited historicals, revenue shifted out of Azure, among other things). However, this shift could create an opportunity for management to pull forward the Azure reacceleration story, supported by Wells Fargo's positive Q1 checks.

In addition, the analysts said that margins remain in-focus as GenAI capital intensity continues to increase. Despite expecting to compound capex growth in fiscal '25 (on top of 75% growth in fiscal '24), Microsoft importantly reiterated its baseline for double-digit revenue and operating income growth in the year ahead.

Turrin and his team expect that new model breakouts/disclosures would help with a clearer picture of margin story for core Azure in context of the significant capex investment cycle forming (i.e., how gross margin trends as Azure AI revenue begin to layer on).

The analysts have raised Microsoft's fiscal '25/fiscal '26 EPS higher to $13.02/$14.83, versus $12.94/$14.68 previously.