Microsoft's Outlook Brightens as Analysts Boost Bullish Ratings

Key Points

• MSFT stock is up 33% since hitting a 52-week low in April, and analysts are raising their price targets.
• Microsoft is now shifting spending toward AI-aligned hardware, which is expected to support future revenue and improve margins.
• Microsoft’s use of its own AI tools to cut costs and boost productivity is boosting investor confidence.

The Magnificent Seven stocks have been rallying since the end of April. A key catalyst has been better-than-expected earnings and guidance. However, unlike in 2023 and 2024, the stocks aren’t trading in unison. Some technology stocks are outperforming the rest, and Microsoft Corporation NASDAQ: MSFT is one of those names.

Since hitting its 52-week low in early April, MSFT stock is up approximately 33%. That’s turned the stock positive in 2025. It’s also trading higher over the last 12 months. However, with Memorial Day behind investors, trading volume may go down, leaving investors to wonder what to do with Microsoft before the company reports earnings again in late July.

The answer may come from NVIDIA Corp. NASDAQ: NVDA in the short term as well as the broader economy. But long-term investors can confidently hold the stock and add to their positions on any meaningful dip. Analysts are maintaining their price targets, including The Goldman Sachs Group Inc. NYSE: GS, which raised its price target on MSFT stock to $550 from $480 on May 21.

A Shift in CapEx Spending May Boost Financials

Over the past year, increased capital expenditures have weighed down Microsoft's gross margin. The company’s overall gross margin is not showing a steep decline, but it’s also not growing as some investors would like.

That's because of the company’s Cloud division and the amount of spending required in the data center area. The company simply didn’t have enough capacity to meet the demand. Turning leased space into new physical facilities is crucial to the company’s AI plans, but Microsoft's spending came at a cost to earnings and free cash flow.

That’s not to say that Microsoft won’t continue to spend, but the kind of spending it will be doing will be more directly aligned with future revenue. In this case, it means the hardware (i.e., CPUs and GPUs) needed to build up the company’s server infrastructure.

Even though earnings will be pressured, margins are expected to improve, which may be enough to justify a run to the all-time high. At the very least, it supports the long-term bull case for MSFT stock.

Practicing What They Preach Regarding AI

Investors can grow skeptical when they hear companies talk about cost-cutting initiatives. The reasoning is that you can’t cut your way to growth. However, investors have been positively giddy about Microsoft’s announcement that it was cutting about 3% of its workforce.

The reason is AI. In this case, Microsoft reported that it is deploying its own AI tools in areas such as customer service, customer support, sales, and finance.

That means the company is maintaining productivity while also improving earnings.

NVIDIA May Be a Short-Term Tell on MSFT Stock

Microsoft's increased hardware spending is largely coming from NVIDIA. We may learn more about that when NVIDIA reports earnings on May 28. Right now, traders appear to be more bearish in the next three to four months.

Sentiment on those short-duration calls may change if NVIDIA issues strong guidance. And if NVIDIA comes in light, the downside appears already priced into the put options.

However, another reason for the bullish short-term outlook may be partly due to Microsoft’s valuation. At 34x forward earnings, MSFT stock is trading at a premium to its three- and five-year averages.  

That said, if momentum traders don’t find a better target to shoot for, a large-cap, blue-chip company like Microsoft will continue to attract attention. Traders are becoming more bullish on longer-dated calls, supporting the expectation of stronger economic growth in the year's second half. Either way, Microsoft is relevant to where AI is expanding today and is certain to have a seat at the table for where AI moves in the future.