Citi Analysts Recommend Microsoft Shares

Citi analysts suggest that investors consider buying Microsoft (NASDAQ:MSFT) shares after a recent pullback, anticipating upside potential in upcoming quarters.

The tech giant's shares have lagged partly due to challenges in justifying significant increases in capital expenditure (capex) and slower-than-expected growth in Azure services and earnings per share (EPS). In a Wednesday note, analysts emphasized a sense of stability in Microsoft, backed by sales data from resellers and Chief Information Officers (CIOs), particularly for the September quarter.

Surveys revealed strong reseller quota achievements during the year to date, despite slightly moderated growth expectations. Although qualitative feedback from customers and partners was mixed, reports of larger M365 CoPilot deals emerged, though large deal momentum has softened overall.

Citi forecasts that the second fiscal quarter results may surpass reduced investor expectations, highlighting how lower expectations could facilitate modest outperformances in key metrics, mainly in Azure consumption. They expect Microsoft to uphold its full-year double-digit growth targets and mention strong capital expenditure insights.

While Q2 guidance may align with predictions, limiting positive adjustments, the analysts believe that post-Q1 conditions could be strategically favorable. They advocate for buying shares during the pullback, expecting improved investor sentiment as Azure growth and EPS recovery accelerates in the latter half of the year.

Additionally, Citi updated its financial model to reflect alterations in Microsoft's reporting segments for fiscal year 2025. This reassessment included factoring in a constrained spending environment as the year closes, resulting in a slight decrease (approximately 2 percentage points) in Office 365 Commercial growth estimates for fiscal year 2027. Conversely, revenue and EPS forecasts for fiscal years 2026 and 2027 remain slightly above consensus expectations.