Microsoft (Nasdaq: MSFT) stock jumped 4.1% through 12:25 p.m. ET Friday after Karl Kierstead, an analyst at investment bank UBS, lowered his price target on the software giant -- but insisted Microsoft stock is a buy anyway.
Kierstead puts Microsoft's price target at $600, implying investors who buy today can expect a 28% profit in 12 months.
Image source: Getty Images.
Why UBS loves Microsoft
In a note covered on StreetInsider.com, Kierstead argues that the "continued ramp of the big Fairwater AI data centers in both Atlanta (which went live in October) and Wisconsin (going live in 1Q26)" are "key near-term catalysts for Microsoft Azure growth." A UBS team recently visited the Wisconsin site and seems to have been sufficiently impressed by the progress there to raise its fiscal Q2 2026 revenue guidance.
The Intelligent Cloud business within which Azure resides is currently Microsoft's second-largest business segment, albeit far less profitable than "Productivity and Business Processes," with an operating profit margin of only 42% (versus 58% for Productivity). 42% may be less than 58%... but even growing a business that throws off mere 42% operating profit margins has to be good for Microsoft's profit growth.
NASDAQ: MSFT
Key Data Points
Is Microsoft stock a buy?
If there's one thing that still concerns the UBS analyst, however -- enough to cause him to lower his price target on Microsoft -- it's the "evident de-rating across the software sector" as investors grow more cautious about overpaying for artificial intelligence.
I'm concerned, too.
Analysts forecast 14% long-term earnings growth for Microsoft, which doesn't seem fast enough to justify the stock's 32-times price-to-earnings ratio if you ask me. Worse, massive capital spending is evaporating the company's free cash flow -- currently just 74% of reported net income.
At the resulting 43-times price-to-free cash flow ratio, Microsoft stock looks too expensive to buy.
