Wells Fargo's Shift: Focus on Microsoft

Investing.com — After downgrading Amazon (NASDAQ:AMZN) this week, Wells Fargo announced an increase in its position in Microsoft (NASDAQ:MSFT), recommending investors include the tech giant in their "Signature Picks" portfolio.

The decision comes amid limited visibility regarding Amazon's future estimate revisions, while Microsoft demonstrates strong momentum in its cloud and AI services, according to Wells Fargo analysts.

The bank removed Amazon from its Signature Picks portfolio following the downgrade due to challenges in the company's outlook. Despite Amazon's solid performance, which saw a 40% rise since its reintroduction to the portfolio in July 2023, Wells Fargo's Ken Gawrelski emphasized a lack of visibility into further positive estimate revisions as the basis for the downgrade.

In contrast, Wells Fargo has increased its Microsoft allocation from 3.9% to 8.9%. Analysts are optimistic about Microsoft's Azure platform and AI capabilities, noting encouraging Azure checks from partners that exceeded expectations in the recent quarter. This was driven by strong demand for cloud migration, modernization projects, and AI workloads.

"Stronger-than-usual checks suggest underlying Azure momentum continuing; expect shares to benefit as more model clarity surfaces through FY25," stated the bank.

Wells Fargo anticipates Azure growth to accelerate, projecting a 33% year-over-year increase in Q1, with 12 points attributed to AI. Microsoft's rollout of Copilot, an AI-powered productivity tool, is expected to gradually enhance adoption and revenue, despite still being in its initial phases.

The bank has set a price target of $515 for Microsoft, reflecting the company's significant scale and promising long-term growth prospects. While current capital expenditures in AI may impact free cash flow multiples, long-term earnings growth remains strong.