Stifel this week reduced its price target on Microsoft (MSFT) to $520.00 from $640.00 but did not change its Buy recommendation on the shares. The research note highlights a tension between continuing cloud revenue strength and pressure on operating profitability as Microsoft scales up AI-related talent and compute resources.
At the time of Stifel's note, Microsoft shares were trading at $465.95. InvestingPro analysis referenced by market reports indicates the stock appears slightly undervalued on current metrics. Microsoft is trading at a price-to-earnings ratio of 33.24 and carries a market capitalization of $3.46 trillion.
Stifel remains constructive on Azure demand. The firm projects that Microsoft will outperform consensus expectations for Azure, forecasting roughly 39% growth on a constant currency basis - about 200 basis points above investor expectations. That projection reflects continued strong demand that the note says is still outstripping supply constraints.
Looking ahead to the third quarter of fiscal 2026, Stifel expects Microsoft to navigate tougher year-over-year comparisons but still to sustain sequential growth trends in line with those recorded in the third quarter of fiscal 2025. The firm indicates Microsoft could guide to approximately 38% year-over-year growth on a constant currency basis for that quarter.
Despite the cloud growth outlook, Stifel flags operating margin compression across fiscal 2026 as a primary concern. The firm attributes this compression to declining gross margins combined with higher operating expenses driven by the need to hire costly AI professionals and to expand computing resources. Stifel also notes that, compared with recent quarters, there is less room for operating margin improvement in the near term.
Stifel further sets out a condition for a material revaluation of Microsoft stock: Azure revenue growth would need to significantly exceed capital expenditure growth. The note suggests this dynamic would likely need to emerge beginning in fiscal 2027 for investors to meaningfully re-rate the company.
The Stifel view comes amid a range of analyst actions from other firms, most of which retain positive stances but with varied target prices. UBS lowered its price target to $600 from $650 while maintaining a Buy rating, citing a de-rating in the software sector. KeyBanc Capital Markets reiterated an Overweight rating and a $630 price target, pointing to increasing enterprise demand for Azure. Jefferies continues to carry a Buy rating with a $675 price target, while observing a roughly 23% compression in Microsoft’s valuation multiple as some investors reallocate toward semiconductor stocks.
Outside analysts' models, Microsoft has been active on commercial and strategic fronts. The company has struck a major sponsorship agreement with the Mercedes Formula One team that will place Microsoft branding on the new W17 car. Financial terms were not disclosed by Microsoft or Mercedes, but the arrangement has been estimated at about $60 million per year.
Separately, OpenAI, led by CEO Sam Altman, has said it will roll out several Codex-related products in the coming month with a stated emphasis on cybersecurity. These moves form part of a broader set of developments that market participants are weighing alongside analyst revisions and valuation shifts.
Together, the analyst notes and corporate developments outline a market narrative in which robust cloud demand coexists with margin pressures tied to AI investment and infrastructure, producing varied reactions across sell-side forecasts and market valuations.