Microsoft’s Grip on OpenAI Is Loosening. Why the Stock Remains a Buy.

Morgan Stanley reiterates Microsoft as a top stock pick in a research note. (AFP via Getty Images)

Key Points

• Morgan Stanley reiterates an Overweight rating on Microsoft and raises its price target to $625 from $582, citing underpriced earnings growth durability.
• Microsoft’s decision to pass on a $300 billion infrastructure deal with OpenAI suggests comfort with enterprise demand and better profit margins.
• Azure’s revenue grew 39% year over year in the fiscal fourth quarter, accelerating from 33% growth, with Microsoft positioned for AI workload migration.

Microsoft stock has stagnated in recent weeks with questions over its cloud-computing growth and its relationship with OpenAI weighing on shares. But the stock still has plenty of room to rise, according to Morgan Stanley.

Calling Microsoft a top pick, the firm reiterated an Overweight rating and lifted its price target on the stock to $625 from $582. “The durability of Microsoft’s earnings growth and the company’s premium return profile remains underpriced,” wrote analyst Keith Weiss.

Shares ticked up 0.3% to $508.70 on Friday.

Concerns about the growing distance between Microsoft and its longtime partner OpenAI came to the fore earlier this month, when The Wall Street Journal reported that OpenAI had agreed to purchase $300 billion in computing power from Microsoft’s cloud rival Oracle .

Given its right of first refusal in providing infrastructure to OpenAI, Microsoft appeared to decline the $300 billion offer, but that may be a positive sign for investors.

“Microsoft passing on the deal likely signals a high degree of comfort with the level of Enterprise demand they are seeing,” Weiss said.

The company, like every AI cloud provider, has a limited amount of semiconductors and power. Allocating those resources to non-OpenAI clients means lower customer concentration, better profit margins, and greater long-term value, Morgan Stanley argued.

Microsoft shares have risen 1.6% since news of the Oracle deal broke on Sept. 10, in line with the S&P 500 ’s 1.5% gain in that period, according to Dow Jones Market Data.

Another question hanging over Microsoft is whether the growth of its Azure public-cloud business is sustainable. Azure revenue grew by 39% year over year in the company’s fiscal fourth quarter, ahead of analysts’ estimates and an acceleration from 33% growth the quarter prior.

Despite the sky-high expectations, Microsoft remains in pole position to capture the value from enterprises migrating AI workloads to public clouds, Morgan Stanley said. And the company keeps spending to support that growth.

“Microsoft’s level of AI-related capex over the last few years or our expectation in the coming years has not changed,” Weiss wrote.

Despite the sluggish price movement in recent weeks, most analysts on Wall Street remain bullish on the stock. Of the 61 analysts polled by FactSet, 59 rate Microsoft a Buy or equivalent, with an average price target of just over $625.

Write to Nate Wolf at nate.wolf@barrons.com