Bank of America raises Microsoft price target to $500 despite heavy investment outlook
Following the release of Q3 earnings on 29 April, the software giant saw its shares dip 4.6% to near $405 due to investor concerns over high spending on infrastructure.
Bank of America analyst Tal Liani has updated his forecast for Microsoft stock following the company's third-quarter earnings report released on 29 April. Despite the shares trading 4.6% lower near $405, driven by concerns that high capital expenditures are impacting free cash flow, Liani has reiterated a buy rating and raised the price target to $500. The analyst justified the valuation by pointing to strong underlying performance in the cloud and artificial intelligence sectors, which he argues outweighs the near-term spending pressures.
The analyst highlighted that Azure revenue growth of 39% in constant currency significantly exceeded Wall Street consensus estimates. Furthermore, Microsoft 365 Copilot paid seats surged by 250% year-over-year to surpass 20 million, reflecting rapid adoption of the firm's AI tools. Liani noted that these metrics, combined with a 24x multiple on 2027 earnings estimates, warrant a higher valuation than the current market price suggests.
However, the outlook for capital spending remains a primary focus for investors. The firm expects 2026 capital expenditures to reach approximately $190 billion, a figure significantly above market expectations. Roughly $25 billion of this increase is attributed to higher component pricing rather than pure volume expansion, while the remainder reflects the scale of infrastructure required to support continued AI growth. This trajectory places Microsoft in line with other hyperscalers who are collectively increasing their investment outlays.
Beyond the financial figures, the company has navigated significant strategic shifts, including a revision of its partnership with OpenAI to remove an exclusive license for OpenAI models. This change follows Microsoft's absence from the latest OpenAI funding round. To bolster its AI strategy, the firm also made leadership changes, appointing Jacob Andreou as executive vice president for Copilot and launching the Copilot Cowork early access program in March.
Despite the stock's year-to-date decline of approximately 16%, Liani believes the sustained revenue growth and margin profile justify the elevated price-to-earnings ratio. He estimates that Microsoft's remaining performance obligations totalled $633 billion as of March 31, 2026, with analysts projecting that roughly 30% of these obligations will be recognised as revenue over the next 12 months. The analyst team also raised EPS estimates for the coming years, projecting $19.19 for 2027.
While the market reacts to the immediate pressure on cash flow from heavy investment, the Bank of America team maintains that the long-term trajectory of the business supports their bullish stance. The firm's confidence rests on the belief that the acceleration in Copilot adoption and cloud growth will continue to drive value, even as the path toward over $1 trillion in global hyperscaler capex by 2027 unfolds.
