Why Microsoft is Morgan Stanley's Top Pick in large-cap software

Investing.com -- Morgan Stanley maintained Microsoft as its Top Pick in large-cap software in a note on Wednesday, citing robust demand across business lines and strong prospects for operating margin expansion.

Analyst Keith Weiss told investors that meetings with Microsoft executives left the firm “with conviction on robust demand translating to durable mid-teens top-line growth and increased confidence in ROI contributing to continued operating margin expansion.”

Weiss added that this dynamic underpins a “high-teens EPS CAGR, not reflected in shares.”

The firm highlighted Azure AI as a key driver. Morgan Stanley said Azure AI gross margins, excluding OpenAI revenue share, could already be around 20%, with potential to reach 30% by FY29 and possibly surpass 40%, implying “very significant levels of upside to our model in the coming years.”

The bank added that the updated Capex-Implied framework for Azure estimates supports this upside and reflects “conversations with Microsoft leadership” that confirm accelerating bookings, RPO, and product usage.

Morgan Stanley also emphasized compelling returns on AI investments, noting “Azure AI margins already positive and tremendous focus on driving continued efficiency.”

The firm sees potential for future OpenAI funding to boost other income and enhance overall shareholder value.

“With shares trading at 23X our CY27 GAAP EPS of ~$20.65, the durability of top-line demand and potential for further margin expansion displayed in Microsoft’s Q1 print remain well underpriced, keeping Microsoft our Top Pick in large-cap software,” concluded Weiss.

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