My Rationale To Buy Microsoft At 415 For A 500 Target

Matein Khalid

In a week where Nasdaq's fabled AI trade was slammed by the emergence of Chinese startup DeepSeek and the vision of a much lower cost efficient and less intensive energy usage performance models, it is ironic that Microsoft (MSFT) shares have traded down to 413 on its Azure stumble even though the world's preeminent software franchise will be the prime winner from lower cost AI hardware and consequent exponential rise in use cases/apps and enterprise adoption.

Mr. Softy closed at 442 last night and actually beat its whisper number for the fiscal quarter but the Azure speed bump has been a public execution, down 29 points as I write. Is this rational? In my opinion, no. So I accumulate MSFT at current levels. Why?

One, MSFT has underperformed its Mag-7 peers since last summer and now trades at the lower end of its 410-460 trading range. MSFT also trades at 28X earnings, which I believe will attract huge institutional flows to position for the brave new world of AI driven software applications.

Two, the Azure cloud franchise exhibits slowing growth. The rationale behind management's lower than expected revenue guidance for this segment. However, Mr. Market has punished the shares by 6.3% for this weaker guidance. Azure's slowdown is a temporary logistics issue that will be resolved while Microsoft AI software business will ramp up dramatically in 2H 2025. So the current 410-415 level on the shares has support from both passive flows into software ETF as well as the buy side ecosystem of Wall Street.

Three, the EPS estimate on MSFT was $3.11 on $68.9 billion revenue but the company reported $3.23 EPS on $69.6 billion. True, Azure growth slowed from 33-31% but this is nowhere near a fundamental problem for the world's second largest public cloud franchise after AWS. The fundamental case to stay bullish on Mr. Softy is intact.

Four, the Street is a tad skeptical about the sheer scale of Microsoft's spending on Gen-AI and the changed nature of its strategic relationship with OpenAI, whose $158 billion market cap and $5 billion in annual losses, ultra expensive, totally opaque/black box AI models make it (as well as Anthropic) and the absurdly priced $50 billion xAI prime losers in a world of cheap, efficient, open-source AI startups. The competitive challenge that DeepSeek revealed is actually bullish for Microsoft in the medium to long term.

Five, Nadella made it clear on the earnings call that he welcomed DeepSeek's innovations even though it is a no brainer for MSFT's legions of engineers to replicate its low cost performance model. The price elasticity of inference model usage to a fall in token prices is immense and the proliferation of software applications will only goose the speed of enterprise AI adoption worldwide. This is nirvana for MSFT's revenue/EPS growth and valuation metrics.

In the midst of a chilly winter I see a 500 target on MSFT as my midsummer night's dream.

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