Microsoft (MSFT) shares slipped slightly in early Tuesday trading and remain in negative territory for the month, but analysts at Morgan Stanley believe the tech giant is well-positioned to capitalize on the expected surge in AI-related spending this year.
Despite a recent dip in its stock, Microsoft is gearing up to invest significantly in its AI strategy, with plans to spend around $80 billion on data centers in 2025. This investment aims to expand the company’s AI capabilities, focusing on training existing models and rolling out cloud-based applications to its vast customer base. Over half of the $80 billion will be allocated to data center projects in the United States.
Brad Smith, Microsoft’s president and vice chairman, emphasized in a blog post that the U.S. is leading the global AI race due to substantial private capital investments and innovations from American companies, both large and small.
The massive capital expenditure is in line with the strategies of major tech firms, including Amazon (AMZN), Google parent Alphabet (GOOGL), and Meta Platforms (META), as they vie for dominance in the rapidly expanding data center market, which will power the growing AI sector. While these investments are substantial, they have yet to reflect in the companies’ bottom lines, and investors are eagerly awaiting signs of how these investments will impact near-term profits.
Morgan Stanley analysts, led by Keith Weiss, have identified Microsoft as the top beneficiary of the expected AI spending boost. Weiss, who maintains an ‘overweight’ rating on the stock with a price target of $548, views Microsoft as the best-positioned company to capitalize on the improving market conditions.
Weiss cited an AlphaWise survey of chief information officers (CIOs) that indicated a 3.8% rise in software spending for 2025, up from 3.5% in 2024. The survey revealed that Microsoft’s Azure cloud platform is the preferred choice for CIOs, with Azure handling 54% of overall workloads and around 41% of CIOs planning to continue using Azure OpenAI over the next 12 months.
In a separate report, International Data Corporation (IDC) projected AI spending to reach $337 billion in 2025, marking a shift from experimental projects to more significant AI-driven transformations in various industries. This shift is expected to be fueled by the introduction of AI agents and a focus on data infrastructure, cloud services, and resilience in the face of economic and cybersecurity challenges.
Microsoft’s fiscal second-quarter earnings, due after market close on January 29, are highly anticipated, with analysts predicting total revenues of $68.84 billion and intelligent cloud revenues, including Azure, of around $28.1 billion. Microsoft finance chief Amy Hood previously indicated that Azure growth would accelerate in the second half of the fiscal year as capital investments increase AI capacity to meet growing demand.
While overall revenue growth is expected to be around 11%, earnings per share (EPS) are forecast to increase by just 6%, putting pressure on Microsoft to generate profits from its heavy capital spending. Weiss highlighted that Agentic AI—systems capable of making decisions and adapting with minimal human input—could be key to bridging this gap. He noted that 66% of CIOs now consider Microsoft the leading vendor for their AI agent strategies.
Weiss also stated that Microsoft is well-positioned to consolidate its software spend while monetizing generative AI (GenAI) over the coming years, making the stock an attractive opportunity, especially as it trades at a 25x GAAP P/E ratio, a discount compared to its peers on a growth-adjusted basis.
As of mid-day Tuesday, Microsoft shares were down 0.17%, trading at $417.28, compared to a modest 0.2% gain in the Nasdaq.
You Might Be Interested In:
