Morgan Stanley reduced its price target on Microsoft (MSFT, Financials) to $472 from $530, citing weakening demand trends and cautious investor sentiment. The firm maintained its Overweight rating on the stock, with the revised target implying a potential upside of more than 22% from the prior closing price.
In a note to clients, analysts at Morgan Stanley said Microsoft shares have lagged behind peers in the large-cap software sector amid a “wall of worry” over macroeconomic and operational challenges. Slowing momentum in core segments such as Azure and Microsoft 365 was flagged as a key factor behind the downgrade.
The analysts projected Azure revenue growth of 31% in constant currency for the March quarter, down from earlier expectations of a stronger rebound in the second half. They now expect further deceleration of 100 basis points in the June quarter. Growth forecasts for Microsoft 365 Commercial Cloud were also revised downward to 13.5% for the third quarter from a prior estimate of 14%, with the team attributing the slowdown to muted adoption of Copilot and lengthening sales cycles.
Feedback from Microsoft's channel partners pointed to continued execution issues and a more cautious approach by customers toward large-scale technology investments, Morgan Stanley said. The firm also anticipates further downside risk to consensus earnings estimates, projecting a 1.4% reduction in forecasts for fiscal year 2025 and a 5.1% decline for fiscal year 2026.
Despite these near-term challenges, Morgan Stanley emphasized that the company's long-term positioning in generative artificial intelligence remains solid. The analysts believe Microsoft shares are approaching a valuation floor and see the long-term risk-reward as favorable, estimating a 3-to-1 upside-to-downside ratio at current levels.
Additionally, the note highlighted that every 1% decrease in capital expenditures could result in a 1.5% increase in free cash flow, potentially offsetting some of the pressure from softer demand trends.
