Bernstein has boosted its price target on Microsoft Corp. (NASDAQ:MSFT) to $660 from $647, following a renewed surge in Azure growth that has reshaped the conversation around the company's substantial AI investments. Analyst Mark Moerdler reiterated an Outperform rating on the stock, arguing that Microsoft's current cloud momentum and backlog now justify the scale of its spending.
The new target represents a roughly 30% upside from Monday's closing price of $506.06, when shares gained 1.2%. According to MarketWatch, the stock has advanced nearly 30% since the company reported its fiscal fourth-quarter results in late July. Despite the recent rally, Moerdler noted that the stock remains at a notable discount to its historical valuation range, trading at around 25 times forward earnings compared to 33 times a year ago.
Microsoft's latest quarterly results underscored the strength of its core business. Revenue and profit both surpassed Wall Street expectations, with Azure growth accelerating to 43% in constant currency, up from 40% in the prior quarter and ahead of the company's own guidance of 39% to 40%. Intelligent Cloud revenue climbed 32% year over year to $39.3 billion, beating estimates of $38.1 billion. Total revenue reached $90.0 billion, an 18% increase, while adjusted earnings per share came in at $4.74, well above the $4.25 consensus.
Capital expenditures, including leases, totaled $41.0 billion, slightly below the $42.0 billion analysts had projected. Remaining performance obligations surged to $678 billion, exceeding forecasts by more than $30 billion, providing strong visibility into future revenue. CEO Satya Nadella highlighted that Azure's annual revenue surpassed $100 billion for the first time, and Microsoft 365 Copilot now has over 30 million paid seats, up from 20 million in April.
The investment community's focus has shifted from demand concerns to the sustainability of returns. Bernstein's analysis of Microsoft's AI commitments reveals a sharp increase in lease obligations, which rose 255% to $329.1 billion, mostly falling between fiscal 2027 and 2033. Hardware commitments for AI are $169 billion in fiscal 2027, with an additional $25 billion beyond that period. Moerdler argues that if AI demand falters, these data centers could be repurposed for traditional cloud workloads, adding flexibility. However, lease commitments are harder to adjust than hardware purchases, making the $169 billion figure a key benchmark for free cash flow.
Wall Street sentiment remains broadly positive, though price targets vary widely. Bernstein's $660 target is above the consensus average of $557 from 33 analysts, which includes 31 Buy or Strong Buy ratings and two Holds. Other recent targets include Goldman Sachs at $640, Morgan Stanley at $600, Wolfe Research at $550, and Barclays at $512. The wide range reflects differing views on the durability of Azure's growth and the impact of heavy AI spending.
Microsoft's market value jumped by nearly $450 billion on July 30, a record single-day gain, after the company guided to approximately 45% growth for Azure in the September quarter. Achieving that figure would bolster Bernstein's case for a higher multiple. A shortfall could reignite concerns about the $169 billion hardware commitment and pressure the stock.
Investors will also be watching upcoming economic data. July's consumer price index is due Wednesday, followed by producer price figures on Thursday. An uptick in inflation could push discount rates higher, potentially testing the market's appetite for long-duration growth assets like Microsoft.
