By Nate Wolf
2025 was merely the prologue in Microsoft's artificial-intelligence story. 2026 will be the inflection point, say analysts at Wedbush Securities led by noted AI bull Dan Ives.
In a research note Monday, Wedbush reiterated an Outperform rating and a $625 price target for Microsoft stock heading into the new year. Wall Street is still underestimating Microsoft's AI growth potential, setting up the company to prove its doubters wrong next year, Wedbush said.
Microsoft stock closed Friday at $485.92. Shares have climbed 15% this year -- a point off from the S&P 500 and well below the tech-heavy Nasdaq Composite's 21% gain.
Concerns about the capital expenditures needed to grow its data-center capacity explain some of the underperformance. Microsoft's stock dropped after its last earnings report in October, when the company reported higher-than-expected capex and said its capex growth rate for fiscal 2026 would be above the rate in 2025.
The company -- along with most observers on Wall Street -- believes those investments will be worth it. Revenue from Microsoft's Azure cloud-computing unit rose 40% year over year in the September quarter, with demand outstripping capacity. The company has a massive cloud base already, and Wedbush thinks 70% of this capacity will be used for AI for enterprise and commercial clients over the next three years.
"We view MSFT as the clear front-runner on the enterprise hyper-scale AI front," Ives and his team wrote, despite mounting competition from Amazon.com's AWS and Alphabet's Google.
In a KeyBanc survey of chief information officers released earlier this month, 91% of respondents expected to spend more with Microsoft's cloud-computing services. IT budgets, meanwhile, are set to grow in 2026, with much of that money being shifted into AI.
Wedbush sees Microsoft adding another $25 billion to its revenue trajectory by the end of fiscal 2026 through wider deployments of Azure and its Copilot AI platform. Beyond that, the firm believes cloud and AI monetization will become an ever-larger piece of Microsoft's business, spurring growth and margin expansion in the coming years.
"In a nutshell we believe Microsoft is set to have a massive 2026 and the stock is a compelling buy at these levels," the Wedbush team wrote.
Investors may not have priced in Microsoft's AI potential, as Wedbush argues, but analysts certainly have.
Of the 62 analysts polled by FactSet, 61 have a Buy or Overweight rating on Microsoft stock, with an average price target just over $630. That's as close to a unanimous endorsement as you can get in the world of mega-cap stocks.
Write to Nate Wolf at nate.wolf@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 22, 2025 09:33 ET (14:33 GMT)
Copyright (c) 2025 Dow Jones & Company, Inc.
Comments