"The tech sector tends to be reasonably rate sensitive, and so in a declining rate environment, the tech sector will be one that a lot of investors will gravitate to," he said. The company's strong free cash flow generation also makes its stock less rate-sensitive than some of its tech peers, according to Keirstead. "I think that's a tolerable trade-off." Interest rates While higher interest rates pressure valuations across the tech sector, the UBS analyst expects Microsoft to benefit disproportionately if rates decline in 2024. "Capex today is a signal that Microsoft is seeing significant AI demand tomorrow," he said. "Even in a tough macro, Microsoft has some powerful idiosyncratic catalysts in the form of AI," he said. Enterprise evaluations of Copilot are already underway, and Keirstead expects associated revenues to start flowing through in the March 2024 quarter. ![]() 1, which could be a near-term boost for the company's Office business. Microsoft is set to make its Copilot AI tool available on Nov. He expects Microsoft to see returns on its investments within a few weeks, if not months. "We are now getting closer to the point where AI spending is beginning to kick in," said Keirstead, who is based in California. But Keirstead believes those investments will pay off in the long run as customers begin paying Microsoft to use its AI services. In recent months, it has splurged on expensive Nvidia GPU chips that power AI workloads. Key driver for stock On top of that, Microsoft is aggressively expanding its artificial intelligence capabilities. The more cyclical personal computing revenue shrank from 44% of total sales to just 25% today. Microsoft cloud and productivity services, which include the Azure Cloud Computing platform and Office 365, had risen to 74.2% of total revenue in June, up from 56% in 2016, according to FactSet data. MSFT YTD line Microsoft also relies heavily on recurring subscription revenues, not "episodic revenue recognition events that can get hurt or rally" along with the economy, he added. That makes Microsoft less susceptible to downturns in any one sector or region. ![]() Why Microsoft? Unlike more focused software companies, Microsoft has "full geographic coverage across all industry verticals," Keirstead said. He cited the company's diverse business lines and steady subscription revenue model. "I would definitely characterize Microsoft as more defensive rather than cyclical," said Keirstead, managing director of software equity research at UBS, in a video recording to clients on Oct. The investment bank's economics team forecasts a mild recession in the United States next year, which could pressure broader equity markets. enters a mild recession next year, according to UBS analyst Karl Keirstead. Microsoft could act as a defensive stock if the U.S. Personal Loans for 670 Credit Score or Lower Personal Loans for 580 Credit Score or Lower Best Debt Consolidation Loans for Bad Credit
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