Microsoft Confident in Long-Term Al Investments Amid Investor Concerns, Jefferies Says

Summary

• Jefferies analysts, led by Brent Thill, noted that Microsoft's investors are primarily concerned about the return on its Al capital expenditures.

Despite market fears, Jefferies analysts headed by Brent Thill say Microsoft (MSFT, Financials) is positive about the long-term return on its large Al expenditures.

Thill remarked that "the ROl on Al Capex continues to be the number one question from investors."

Thill noted, "MSFT feels it has more conviction in this cycle than it had in Cloud due to its leading position in Al whereas it was behind AWS (AMZN, Financials) in Cloud." Jefferies analysts expressed belief that these investments "will pay off, but it will be a LT journey, not an immediate impact."

Microsoft said that, with use increasing quarter-over-quarter during the first quarter of fiscal 2025, adoption and use of its Al-powered Microsoft 365 Copilot had exceeded expectations. Expected o rise by another 14% in the current quarter, M365

Commercial Cloud growth climbed 16% in the first quarter 

"MSFT notes that the cost structure for Al remains higher today," Thill stated, adding, "Management remains conscious of the monetization strategy and will continue to monitor the LT margin profile of Al products. While it did not provide specifics, they are optimistic about Al's LT margin profile, highlighting its accelerating demand, significant amount of IP, and momentum in both first- and third-party distribution."

Jefferies also noted that as artificial intelligence use increases Microsoft plans to increase its capital expenditures over the next years. Moreover, Microsoft has a legally exclusive agreement with OpenAl, which lets OpenAl rent hardware from other companies only with Microsoft's approval.

With a price target of $550, Jefferies has a Buy recommendation on Microsoft implying an approximate 29% upside rise from its present share value of $426.32