As Microsoft spends heavily on capital expenditures to support its artificial intelligence initiatives, Wall Street firm Morgan Stanley is questioning when the software giant will see a return on its investments. Meanwhile, Microsoft stock rose Wednesday.
"With Microsoft's capital expenditures poised to nearly double from $32 billion in fiscal 2023 to our forecasted $63 billion in fiscal 2025, the question of monetization against these investments rises to the forefront for many investors," Morgan Stanley analyst Keith Weiss said in a client note Wednesday.
After digging into the question of return on investment, Weiss said he was left with more questions than answers.
Still, Weiss reiterated his overweight rating on Microsoft stock with a price target of 520.
Microsoft stock has pulled back after hitting a record high of 468.35 on Friday. On the stock market today, Microsoft stock rose 1.5% to close at 466.25.
Microsoft Stock Is On Three IBD Lists
A "lack of visibility" makes it difficult to determine a return on investment for Microsoft's generative AI capex, Weiss said.
Open questions include the margin profile of gen AI offerings and the accounting around Microsoft's relationship with tech partner OpenAI, he said.
Another unknown is "the split of investment between training of models (potential future monetization) and inference (supporting current monetization)," Weiss said.
Microsoft's AI revenue streams include its Azure AI Services, Microsoft 365 Copilot and GitHub Copilot.
Microsoft's capex on generative AI in data centers is seen ramping from $16 billion in fiscal 2024 to $23 billion in fiscal 2027, Weiss said. Meanwhile, he predicts generative AI revenue of $5.3 billion in fiscal 2024 and $37.9 billion in fiscal 2027. Those estimates assume a "relatively modest" gross profit margin of about 50% in fiscal 2027, he said.
Microsoft stock is on three IBD lists: SwingTrader, Long-Term Leaders and Tech Leaders.
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