Bank of America Maintains Bullish Outlook on Microsoft, Citing Continued Cloud and AI Growth
Bradley Sills, an analyst at Bank of America Securities, has reiterated a ‘Buy’ rating for Microsoft Corp (MSFT) with a price target of $510. Sills’ confidence stems from Microsoft’s strategic position to generate consistent low double-digit growth in the next 3-5 years. This growth trajectory is underpinned by the continued adoption of its Azure cloud infrastructure platform, the cloud-based Office 365 productivity suite, and the profitable Games and Game Pass revenue stream from Xbox.
While a shift in revenue mix towards lower-margin Azure and O365 segments might temporarily offset scale benefits, Sills anticipates that operating expense scaling will drive stable annual margin expansion of 50 basis points in the years to come. He also expects Microsoft to deliver solid, or potentially better-than-expected, first-quarter fiscal 2025 results.
Azure Growth Remains a Key Driver
Sills expects a 0% to 1% upside to his first-quarter revenue estimate of $64.7 billion (representing a 14% year-over-year increase, or 11% organically). This optimism is driven by steady workload migration to Azure and the momentum in the Office premium E3 and E5 upgrade cycles, which are partially offset by softening in the PC and Windows markets. His interactions with industry partners suggest a strong migration of workloads to Azure, driven by cloud migration and expanding AI capabilities. Security continues to be a key strength for Microsoft, according to Sills. He anticipates upside Azure growth of 33%-34% year-over-year, fueled by AI, exceeding his base estimate of 33% (11% from AI).
AI Integration and Office 365 Copilot Revenue
Sills’ estimate for M365 Copilot revenue remains modest at $275 million. He anticipates a largely inline result for the Personal Computing segment with his estimate of $12.5 billion (representing a 12% year-over-year increase). Notably, the stock has gained 10.4% year-to-date, fueled by enthusiasm for AI-driven growth in Azure and Office. However, shares have recently lagged due to concerns surrounding increasing capital expenditures (capex) and limited visibility on the return on investment.
Valuation and Outlook
Sills maintains a positive outlook, emphasizing that the stock is trading at 32 times the calendar year 2026 free cash flow. This valuation is not considered stretched given the durable low to mid-30s Azure growth, low mid-teens Office growth, and long-term scale on capex. He anticipates multiple expansion as Microsoft approaches the expected second half of fiscal 2026 Azure reacceleration. Sills forecasts first-quarter revenue of $64.42 billion. His price target of $510 is based on an EV/FCF multiple of 40 times calendar year 2026 FCF, or 1.9 times adjusted for low 20s growth. This represents a premium to the software GARP group, which is valued at 1.5 times for its durable growth.
