Microsoft shares go from laggard to leader as AI growth improves

An audience member at the Microsoft Build conference opening keynote in Seattle, Washington. Photo by JASON REDMOND/AFP via Getty Images files

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After languishing for months, Microsoft Corp. shares are back within striking distance of a record high amid signs that performance in its Azure cloud-computing business is back on track.

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The software giant’s shares are about 1.5 per cent shy of the record reached last July, with their 16 per cent advance in May putting them on track for the best month in more than three years. The rally has been fueled by the broader rebound in U.S. equities, as well as better-than-expected results from Azure, which investors are betting will continue as artificial intelligence drives more business.

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“AI is becoming a bigger and bigger component of those revenues,” said Nancy Tengler, chief executive officer at Laffer Tengler Investments. “I do think it’s a sustainer.”

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The strength in Microsoft shares is a stark reversal from last year, when concerns about its position in the AI race and disappointing Azure growth weighed on the stock. Microsoft’s 12 per cent advance in 2024 made it the worst performer among the so-called Magnificent Seven stocks, which also includes Apple Inc., Nvidia Corp., Alphabet Inc., Amazon.com Inc., Meta Platforms Inc. and Tesla Inc.

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This year, Microsoft’s nine per cent advance has outperformed all of those peers save for Meta, which is up 10 per cent. In addition to benefiting from limited exposure to President Donald Trump’s tariffs, Microsoft emerged as one of the biggest winners from a mostly strong earnings season for Big Tech.

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The Redmond, Wash.-based company reported revenue and profit in its fiscal third quarter that beat Wall Street estimates. Azure was the standout, with revenue growth of 33 per cent exceeding expectations.

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Azure’s sales include both AI services — the computing power that backs OpenAI Inc.’s ChatGPT and similar tools — and other products such as databases and on-demand storage. Microsoft chief financial officer Amy Hood said last month that it was those non-AI businesses that outperformed expectations in the most recent quarter.

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This week, TD Cowen analysts led by Derrick Wood projected that AI-related Azure revenue would rise to about US$24 billion in the 2026 fiscal year, from roughly US$4 billion in fiscal 2024. The analysts, who have a buy rating on the stock, raised their price target to US$540 from US$490, implying a potential gain of about 18 per cent from Wednesday’s closing price. Of the 72 analysts tracked by Bloomberg that cover Microsoft, only six have hold ratings and none recommend selling.

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“A return to Azure upside trends and firmer growth in the mid-30 per cent level should help drive a stronger narrative around Azure and greater fund flows back into MSFT,” TD Cowen analysts wrote on Tuesday, referring to the company by its ticker symbol.

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At 30 times profits projected over the next 12 months, Microsoft is priced at a premium to the Nasdaq 100 Index and its own 10-year average, both of which sit around 26 times, according to data compiled by Bloomberg.