After a prolonged and significant downturn, Microsoft's stock is attracting renewed attention from Wall Street. Some analysts believe the current price point may offer a reasonable buying window as AI capital expenditure begins to translate into revenue. However, strategic missteps in the company's data center expansion are simultaneously applying ongoing pressure to the growth of its cloud business.
Recently, Bernstein analyst Mark Moerdler suggested in a client note that revenue growth for Microsoft's Azure cloud platform is likely to accelerate over the next two quarters. His reasoning points to the typical six-month cycle from hardware procurement to revenue generation, a transition point that is now approaching. He views the current stock price as a sensible entry point for new investors.
Concurrently, Piper Sandler analyst Billy Fitzsimmons stated in a report last week that, despite widespread market concerns over capital expenditure, Microsoft remains one of the most defensive companies in the software sector. He identified the Azure cloud infrastructure, which directly benefits from AI demand, as a core supporting factor.
Furthermore, as previously reported, Microsoft slowed its data center construction last year and is now working to catch up. To address the shortfall, Microsoft has recently turned to off-grid data center solutions powered by natural gas, signing multiple large agreements in Texas and West Virginia with a total planned capacity exceeding 4.75 gigawatts.
While the stock has rebounded from its lows, it remains significantly down for the year. Microsoft's share price has faced considerable pressure in 2024. From its historical closing high of $542.07 on October 28 last year, the stock fell to a one-year low of $356.77 on March 27, representing a cumulative decline of 34.2%.
Recent sessions, however, have shown signs of stabilization. The stock rose 3.6% on Monday and gained another 2.3% on Tuesday, marking a cumulative rebound of approximately 10.2% since the March 27 low. Mark Moerdler characterized this movement as the stock "oscillating near a bottom" and suggested that, despite lingering uncertainty about when AI spending will translate into tangible revenue, the current valuation presents an attractive entry opportunity for new investors.
From a broader perspective, Microsoft's stock is still down 18.7% year-to-date, performing slightly better than the iShares Expanded Tech-Software Sector ETF (IGV), which has fallen 24.8% this year. This ETF recently touched its lowest closing price since November 2023, indicating that the broader software sector's bottom confirmation lagged behind Microsoft's by approximately three weeks.
The core concern for investors revolves around the delayed impact of Microsoft's substantial AI infrastructure investments on Azure's revenue growth. Mark Moerdler's report offers a framework to understand this delay.
He noted several valid reasons why capital expenditure hasn't immediately translated into Azure growth. Microsoft is likely dedicating a significant portion of its computing power to training its own models and supporting first-party applications like Office and Copilot. These investments do not directly contribute to external cloud service revenue in the short term.
The critical factor is the timing. Moerdler indicated that Microsoft typically requires about six months from purchasing hardware components to servers generating revenue. "This transition began two quarters ago, and we believe Microsoft is about to start seeing the benefits," he wrote. This implies that, if accurate, signals of accelerated Azure growth could become visible in the company's financial reports as early as the next two quarters.
The premise for Azure's accelerated growth, however, faces a test stemming from a self-inflicted challenge. According to a report, Microsoft CFO Amy Hood actively halted several data center expansion plans from late 2024 into early 2025, leading to the cancellation or delay of projects in the US and Europe. This financial decision inadvertently ceded valuable grid access opportunities. Oracle subsequently secured substantial public power capacity in Port Washington, Wisconsin, while Alphabet accelerated the development of two campuses in Indiana.
To bridge the capacity gap, Microsoft has recently shifted towards off-grid data center solutions reliant on natural gas for power generation. The company has signed multiple large agreements in Texas and West Virginia, with a total planned capacity exceeding 4.75 gigawatts. This strategic pivot is more costly and creates tension with Microsoft's longstanding public commitment to clean energy, surprising some industry infrastructure professionals.
Microsoft has publicly acknowledged that its Azure cloud business will continue to face capacity constraints at least until the end of the current fiscal year in June.
Some analysts maintain a relatively optimistic medium-term outlook for Microsoft, citing structural advantages in its business model. Piper Sandler's Billy Fitzsimmons acknowledged in his recent report that market concerns about capital expenditure are valid but reiterated that Microsoft remains one of the software sector's most defensive players. The core logic is that Microsoft can directly monetize AI demand through its Azure cloud infrastructure, which continues to face robust end-user demand.
Oracle's stock surged 18% over the past two trading sessions. Although it remains down 16.4% for the year, its recent strength partly reflects a market reassessment of the cloud infrastructure sector. For Microsoft, the critical variable for sustaining the current rebound will be its ability to meet expectations for accelerated Azure growth once capacity constraints gradually ease.
