Potential tailwinds suggest Microsoft EPS upside

By Sam Boughedda

Morgan Stanley said more durable than feared demand, opex discipline, and shifting foreign exchange impacts suggest a potential upside to Microsoft’s (NASDAQ:) EPS.

The analysts, who maintained an Overweight rating and $307 per share price target on Microsoft, told investors in a 2Q23 preview note that while it’s not hard to find indicators that the tech giant is not immune to the weaker IT spending environment, the majority of evidence in its survey work suggests favorable near-term consolidation trends. In addition, they stated that it also points to further improvement in the longer-term positioning against core secular growth initiatives.

“While an elongated period of cloud optimization could leave Azure growth below the company’s guidance implying 37% constant currency (cc) YoY growth, and 3QFY23 guidance could point to further deceleration to the low 30%’s in cc, we believe investor bogeys of ~35%-36% YoY cc Azure growth and a FY23 exit rate of 26-28% YoY cc are already well reflected in the shares,” wrote the analysts.

They added that with a current hiring pause in place (Microsoft announced workforce reductions of approximately 10,000 employees after the note’s release), they see opex growth “decelerating significantly into the second half of Microsoft’s fiscal year.” Furthermore, they said a recent weakening of the USD will shift FX impacts to benefit Microsoft’s results.

“Longer-term, we remain confident in Microsoft’s durable double-digit constant currency growth profile and expanding margins, supporting an attractive risk/reward profile. At ~20x 2024 EPS, or ~1.2x 2-years PEG, Microsoft trades at a discount to its historical trading range, other large cap software peers, as well as other megacap tech names,” concluded the analysts.