Microsoft (NASDAQ:MSFT) investors have been on edge lately, wondering whether the company’s AI growth could take a hit amid concerns about slowing data center spending.
But after virtual investor meetings with Microsoft’s Director of IR, Danielle Criste, Cowen’s Derrick Wood, an analyst ranked in the top 2% of Wall Street stock experts, is offering some reassurance. According to Wood, Criste emphasized that while Microsoft’s data center strategy is evolving, it hasn’t fundamentally changed – “it’s simply going through a different phase.”
A couple of years ago, the company experienced a sharp increase in AI demand and responded with an aggressive expansion of its data center capacity to meet that demand. Now, Microsoft sees a much better balance between data center supply and AI demand. As a result, the company anticipates that CapEx growth will moderate and will be “tracking more in-line” with general Azure demand growth in fiscal year 2026 and beyond.
“We get the sense that while there are some re-calibrations & tweaks going on as MSFT enters this new phase (incl. the new Right-of-First-Refusal structure w/ OpenAI), this broader arc of build-out is generally in-line w/ its multi-year strategy, incl. having the ability to adjust spend on long-lived vs. short-lived and owned vs. leased infrastructure based on evolving market conditions,” the 5-star analyst said on the matter.
On the Azure front, the Q2 growth of 31% (in constant currency) was affected by “weaker growth” in non-AI workloads, primarily within its “scale” SMB segment. Management is now focused on achieving a more balanced approach, though they expect it will take some time to have an impact. For Q3, Microsoft’s Azure guide of 31-32% growth assumes some acceleration in AI workloads but no immediate improvement in non-AI growth.
On Copilot adoption, the company thinks it is going well, while recognizing that “large-scale shifts take time.” Microsoft highlighted the fact that since the launch, its initial cohort has increased licenses by 10 times, and customers are purchasing more seats after the proof of concept deployment. Additionally, there has been a rise in usage intensity, which is seen as a strong indicator of ROI (return on investment).
Lastly, regarding its relationship with OpenAI, that has not changed significantly. What’s new is that Microsoft now holds a right of first refusal (ROFR), meaning that whenever OpenAI requires additional capacity, they must approach Microsoft first.
So, what does this all mean for investors? Wood kept a Buy rating on the shares along with a $475 price target, suggesting the stock will gain 24% over the next 12 months. (To watch Wood’s track record, click here)
And it’s not just Wood who’s optimistic. Among other analysts covering the stock, 27 also give it a Buy, while just 3 stay on the sidelines, reinforcing a Strong Buy consensus. The average price target lands even higher at $507.54, suggesting a potential 32% gain in the coming year. (See MSFT stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
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