Microsoft shares have climbed 30% since strong fiscal fourth-quarter results, and Bernstein analyst Mark Moerdler expects another 30% rally, raising his price target to $660. He argues that concerns over Microsoft's AI spending overstate the risk, pointing to lighter-than-expected capital expenditures and flexible lease and hardware commitments.
Microsoft shares have climbed 30% since the company reported fiscal fourth-quarter results in late July, putting the stock into positive territory for the year. Bernstein analyst Mark Moerdler thinks the rally has further to run. He raised his price target to $660 from $647, implying room for the stock to climb more than 30% higher.
Valuation still below last year's level
Shares of Microsoft now trade at 25 times forward earnings, a discount to the 33x valuation multiple the stock commanded a year ago. Moerdler's new target implies a 27x forward multiple, still below that prior range but well above where shares trade today.
Capital spending comes in lighter than feared
For the most recent quarter, Microsoft spent $41 billion on capital expenditures and finance leases, less than expected. The company also extended the useful life of its data centers to 25 years from 15, a change that lowers long-term AI costs. Investors still worry Microsoft is overbuilding its AI capacity, but Moerdler describes that concern as a misunderstanding of the company's trajectory.
Lease commitments jump, but on a longer runway
Microsoft's future lease obligations climbed 255% in the latest fiscal year to $329.1 billion. Moerdler notes those commitments are being rolled out over a seven-year period from 2027 to 2033, with individual lease terms of one to 20 years, producing what he called "a reasonable mid-teens growth of long-term lease expenses" in line with historic norms. Many of the contracts also carry cancellation clauses that could apply if AI build-outs stall.
Hardware purchases pull back sharply after 2027
For fiscal 2027, Microsoft committed $169 billion in purchase agreements for chips, power contracts, cooling systems and other AI infrastructure. Commitments for fiscal 2028 and beyond total just $25 billion — meaning that if AI turns out to be the bubble some argue, Moerdler says Microsoft may end up holding data centers rather than AI-specific hardware, the far larger cost of AI capacity. Bernstein estimates AI made up roughly 17% of Microsoft's Commercial Cloud revenue in fiscal 2026, leaving traditional cloud operations as a prominent growth driver.
Source: MarketWatch
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