JP Morgan: AI short sellers, step aside! The turning point for Microsoft's Azure cloud has arrived

The "Seven Sisters of US Stocks" saw a strange phenomenon in the first quarter financial reports — Investors are not paying much attention to direct profit situations, but instead focusing all their attention on the companies' future investment plans.

In particular, Meta announced that it will increase its AI infrastructure investment by as much as $10 billion this year, leading to an 11% plunge in its stock price, marking the largest single-day decline since October 2022. Microsoft also plans to continue investing heavily in the AI field, which dragged down its stock price, but quickly rebounded after the financial report was released.

This phenomenon reflects investors' lack of confidence in AI, as they are concerned that large models may lack monetization capabilities, making it difficult to support the current high valuations of tech stocks.

However, major Wall Street banks believe that strong demand will continue to drive AI growth. In the analysis of Microsoft's financial report released last week, analysts from JP Morgan led by Mark R Murphy stated that the growth rate of Microsoft's Azure business not only met market expectations but also exceeded them in certain key indicators. This not only marks a new milestone for the Azure business but also indicates that the cloud services market may be on the verge of a new growth phase.

Based on the optimistic outlook for Azure cloud services, JP Morgan maintains its buy rating on Microsoft and raises the target price from the previous $440 to $470. As of the time of writing, Microsoft's stock price is at $406, with a year-to-date increase of over 9%.

Azure Cloud Services Reach a New Milestone

Financial reports show that Microsoft's core Azure services and Azure AI services are experiencing accelerated growth.

Revenue from Azure and other cloud services grew by 31%, surpassing the market's expected growth of 28.6%. It is worth noting that AI contributed a 7 percentage point increase to Azure revenue this time, higher than the 6 percentage points in the previous quarter and 3 percentage points in the quarter before that, indicating that AI is indeed driving accelerated growth in cloud revenue.

Microsoft pointed out that besides AI services, other parts of Azure's business have shown demand exceeding expectations in various industries and customer segments. This means that Azure's growth is not only driven by AI technology but has a broader market foundation.

Microsoft also mentioned that in the short term, the demand for AI services slightly exceeds Microsoft's current supply capacity. This indicates that the market demand for Azure AI services is very strong, but due to supply constraints, this intense demand has not fully translated into revenue growth Morgan Stanley stated that despite the slight negative impact of supply constraints in the first quarter on AI service growth, Microsoft expects this impact to continue into the second quarter, but only "slightly." Microsoft is gradually increasing its cloud service supply capabilities to meet strong market demand, indicating the possibility of more growth opportunities in the future.

We have reason to question the universality of cloud migration (enterprises migrating from traditional platforms to cloud platforms)—nevertheless, we believe this represents an overall upward trend.

Due to its early leadership position in the AI field and the high market recognition of its Azure OpenAI service's API-driven model, Microsoft may experience more significant growth. This "Azure halo effect" may bring about a boost for Azure beyond general expectations.

Morgan Stanley stated that with the continuous growth in cloud service demand and the continuous advancement of AI technology, Azure is standing at a new starting point, ready to embrace a broader future. For investors, this is undoubtedly a positive signal, indicating Microsoft's more solid leadership position in the cloud service market and the potential to continue its growth momentum in the coming years.

Increasing Recognition in the AI Collaboration Tools Market

Morgan Stanley also emphasized Microsoft's market leadership in AI collaboration tools (such as M365 Copilot) and development platforms (such as GitHub), and how these products attract and retain users through continuous innovation and market expansion.

Microsoft pointed out that nearly 60% of the Fortune 500 companies have started using M365 Copilot, demonstrating an accelerating trend of adoption across industries and regions.

At least eight well-known large companies (including Accenture, BP, Cognizant, Koch Industries, Moody's, Nokia, NVIDIA, and Tech Mahindra) have purchased over 10,000 M365 Copilot seats, indicating high recognition of this product by large enterprises.

GitHub's paid subscribers reached 1.8 million, with quarterly growth accelerating to over 35% QoQ, and GitHub's revenue growth rate exceeding 45% YoY, with over 90% of the Fortune 100 companies now being GitHub customers.

Morgan Stanley wrote:

It is clear that generative AI technology resonates with developers, and we expect this to become more evident over time.

What Does the Unexpected Increase in Capital Expenditure Mean?

Microsoft's first-quarter capital expenditure was $14 billion, higher than the expected $13.14 billion, with a significant increase in capital expenditure expected for the next quarter, and capital expenditure for the 2025 fiscal year is projected to continue to exceed that of the 2024 fiscal year.

Morgan Stanley pointed out that Microsoft's increase in capital expenditure demonstrates confidence in future market demand, which will support further enhancement of cloud and AI product supply capabilities Microsoft plans to increase capital expenditures to address the strong demand signals it has observed in the cloud services and AI product areas. In particular, the supply capacity of AI products has reached its limit due to customer demand exceeding expectations.

We believe that the ratio between demand and supply has always been in a "tight" state, but it is worth noting that even with a $2.5 billion increase in capital expenditures to $14 billion in the first quarter, demand still slightly exceeds supply capacity - indicating a rapid growth in market demand.

Although this may put some pressure on cash flow and profit margins in the short term, in the long run, this investment will provide a solid foundation for Microsoft to maintain its leading position in the fiercely competitive cloud market.

JPMorgan predicts that Microsoft's adjusted earnings per share (EPS) for the fiscal years 2024 and 2025 will reach $11.73 and $12.97, respectively.