Microsoft shares edged lower in early Tuesday trading and remain in negative territory for the month but could be in “pole position” to benefit from a surge in AI-related spending this year, according to analysts at Morgan Stanley.
Microsoft (MSFT) , which will report its fiscal second-quarter earnings later this month, recently unveiled plans to spend around $80 billion on data centers this year as it expands its AI-focused strategy to train existing models and roll out cloud-based applications to its client base.
Related: Veteran trader discloses his top stock pick for 2025
Microsoft’s president and vice chairman, Brad Smith, said more than half of that $80 billion will be spent in the United States.
“Today, the United States leads the global AI race thanks to the investment of private capital and innovations by American companies of all sizes, from dynamic start-ups to well-established enterprises,” Smith said in a blog post earlier this month.
Morgan Stanley analyst Keith Weiss thinks Agentic AI is an ‘underappreciated” aspect of the tech giant’s opportunities in the new technology.
Capital spending has been a key investor focus for the so-called hyperscalers, such as Microsoft, Amazon (AMZN) , Google parent Alphabet (GOOGL) and Meta Platforms (META) , as they race to capture a commanding share of the data center market that will ultimately power the AI investment thesis.
Microsoft capital spending surges
That massive cash outlay, however, has yet to find its way into the bottom line of those companies and investors are keen to see how the historic spending will translate into near-term profits.
Morgan Stanley analysts see Microsoft as the likely top beneficiary of the increase in AI spending expected from companies that are looking to capitalize on the AI tech boom.
Microsoft is seen as “the best-positioned franchise to gain from an improving spending backdrop,” said Morgan Stanley analyst Keith Weiss, who carries an ‘overweight’ rating and a $548 stock price on the tech giant.
Related: Analyst reworks Microsoft stock price target in software review
Citing the AlphaWise survey of chief information officers, who often dictate the direction of companies’ tech spending plans, Weiss sees overall spending on software rising by 3.8% from last year in 2025, compared to a 3.5% growth rate in 2024.
Azure, Microsoft’s flagship cloud product, was the preferred vendor for CIOs in the AlphaWise survey, handling around 54% of overall workloads, with around 41% expecting to keep Azure Open AI over the next twelve months.
In a separate update published late last year, International Data Corporation pegged AI spending at $337 billion in what it called “a shift from experimentation to reinvention.”
“This shift will be driven by the introduction of AI agents, renovations in data, infrastructure, and cloud to deliver scalable ‘answers,’ and an enhanced focus on resilience through sound economics and pervasive cyber-recovery,” IDC said.
Microsoft earnings in focus
Microsoft will publish its December quarter earnings after the market closes on Jan. 29, with analysts looking for overall revenues of $68.84 billion and Intelligent cloud revenues, which includes Azure, of around $28.1 billion.
“We still expect Azure growth to accelerate from H1 (in the second half of the financial year] as our capital investments create an increase in available AI capacity to serve more of the growing demand,” Microsoft finance chief Amy Hood told investors in late October.
Still, overall revenue growth of around 11% will outpace the 6% gain expected in earnings per share, which are forecast to come in at $3.13, putting further pressures on Microsoft to monetize its massive capital spending plans.
Related: Analysts revamp Microsoft stock price targets on AI chip-demand shift
Morgan Stanley’s Weiss hints that Agentic AI, which effectively creates systems that act, adapt and make agent-like decisions with minimal human supervision, could be key to bridging that gap.
“Most underappreciated, in our view, is
that the next chapter of Agentic AI is coming into focus with 66% of CIOs now
citing Microsoft as the vendor they are most likely to leverage for their AI agent
strategies,” Weiss and his team wrote.
More AI Stocks:
Veteran fund manager reveals startling AI stocks forecast for 2025Meta’s new vision could change both AI and social mediaAnalysts reveal AI stock picks for 2025, including Palantir
“We see Microsoft well-positioned to consolidate software spend while
effectively monetizing GenAI over a multi-year time-frame, setting up an attractive
opportunity with the stock trading at 25x GAAP P/E and a discount to peers on a
growth-adjusted basis,” he added.
View the original article to see embedded media.
Microsoft shares were marked 0.17% lower in mid-day Tuesday trading, against a modest 0.2% gain for the Nasdaq, and changing hands at $417.28 each.
Related: Veteran fund manager issues dire S&P 500 warning for 2025
