5) Microsoft Corporation (NASDAQ:MSFT)
Number of Hedge Fund Holders: 279
Average Upside Potential: 19.3%
Microsoft Corporation (NASDAQ:MSFT) is involved in the cloud computing business through its cloud platform, Microsoft Azure. It provides a wide range of cloud services, which include infrastructure-as-a-service (laaS), platform-as-a-service (PaaS), and software-as-a-service (SaaS). While Microsoft Corporation (NASDAQ:MSFT) faced capacity constraints that impacted Azure’s growth potential, it remains optimistic about future prospects. The integration of Al capabilities into Azure cloud services should contribute to Azure’s growth rates. In Q1 2025, Azure’s revenue saw an increase of 33%, thanks to the Al services.
Azure growth included ~12 points from Al services, similar to last quarter. Microsoft Corporation (NASDAQ:MSFT) highlighted that demand continues to be higher than its available capacity. Even non-Al growth trends were also in line with expectations with customers continuing to migrate and modernize on its Azure platform. Mark Moerdler from Bernstein remains optimistic about Microsoft Corporation (NASDAQ:MSFT)’s growth prospects. The expected acceleration in Azure’s revenue growth, anticipated to reach 35% – 40% YoY in H1 2025, was the critical driver behind optimism.
Talking about the capacity constraints, the expansion of the global data center network should help Microsoft Corporation (NASDAQ:MSFT) address these challenges. As per the company’s Vice Chair and President Brad Smith, the company expects to spend $80 billion in fiscal 2025 on the construction of data centers capable of handling Al workloads. Notably, more than half of the anticipated Al infrastructure spending is expected to take place in the US.
RiverPark Advisors, an investment advisory firm and sponsor of the RiverPark family of mutual funds, released its Q3 2024 investor letter. Here is what the fund said:
“Microsoft Corporation (NASDAQ:MSFT): MSFT was a top detractor in the third quarter following a fiscal fourth quarter earnings report that featured inline operating metrics but mixed guidance. Positively, the company reported strong revenue (+15%) and earnings growth (+10%), powered by Azure (+30%), and operating margins of 43%. Guidance however calls for lower than expected fiscal first quarter Azure revenue as infrastructure constraints limit growth, and higher capital expenditures throughout the company’s fiscal 2025 to alleviate these constraints. The company expects growth to reaccelerate in the back half of fiscal 2025 as more AI capacity comes online.
Cloud-based services have become the company’s largest revenue and earnings producer. The company’s Azure platform alone has the potential to grow to more than $200 billion in annual revenue over the next decade. Overall, we believe that the company will continue to deliver double-digit revenue and EPS growth and generate an enormous amount of free cash flow to return to shareholders and use for acquisitions.”
