In the rapidly evolving tech landscape where artificial intelligence (AI) is steering the direction of investments, Loop Capital analyst Yun Kim has spotlighted Microsoft (MSFT) as a standout among its peers. On December 23, Kim raised his price target for Microsoft from $500 to $550 while maintaining a ‘buy’ rating on the stock, which last closed at $439.33. His analysis suggests that while the consensus estimates might undervalue Microsoft due to its significant capital expenditure (capex) in generative AI (GenAI) initiatives, the company’s strategic investments warrant a higher market valuation compared to other large-cap software firms.
The tech industry’s capex has seen an unprecedented escalation, driven by the AI boom. Data from recent years illustrate this trend vividly. In the first half of 2023, Big Tech companies invested around $74 billion in capex, which according to a Forbes report, escalated to $109 billion by the third quarter. Fast forward to 2024, and the first half saw an investment of nearly $104 billion, marking a 47% increase year-over-year. By the third quarter, this figure had jumped to $170 billion, reflecting a 56% increase from the previous year.
Microsoft, alongside Amazon (AMZN), has been at the forefront of this spending spree, with a combined expenditure of $42.6 billion in Q3 2024. Alphabet (GOOG, GOOGL) has maintained a steady investment rate of approximately $13 billion per quarter, while Meta (META) has begun to ramp up its outlays, signaling a sector-wide commitment to AI infrastructure.
During Microsoft’s Q1 2025 earnings call, CFO Amy Hood shed light on the company’s capex strategy. She reported that capital expenditures, including finance leases, amounted to $20 billion, aligning with what was anticipated. The cash spent on property, plant, and equipment (PP&E) was $14.9 billion. Hood emphasized that a significant portion of Microsoft’s cloud and AI-related investments are directed towards long-lived assets, expected to facilitate revenue generation over the next 15 years. Moreover, the spending on servers, including both CPUs and GPUs, is tailored to meet customer demand for AI services, indicating a strategic alignment of expenditure with market needs.
However, this aggressive investment in AI has its trade-offs. Hood noted a 7% decline in free cash flow to $19.3 billion year-over-year, attributed to the higher capital expenditures necessary to bolster Microsoft’s cloud and AI offerings. This scenario reflects a broader industry challenge where the rush to capitalize on AI’s potential might strain immediate financial liquidity but is expected to yield substantial long-term benefits.
Kim’s optimism about Microsoft, despite the high capex, underscores a belief in the company’s ability to convert these investments into sustainable growth and profitability. Microsoft’s position in the AI and cloud sectors, combined with its strategic foresight in investing in long-term infrastructure, positions it as a leader poised to benefit from the AI revolution. This perspective not only highlights Microsoft’s potential for value creation but also signals to investors the importance of looking beyond short-term financial metrics in evaluating tech giants in the AI era.
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