"Data Center Withdrawal Storm," Goldman Sachs Speaks Out: Maintains Capital Expenditure Forecast, This is Good News for Microsoft's Profits

On February 24, Goldman Sachs analysts Kash Rangan, Gili Naftalovich, and others released a report stating that despite recent reports suggesting that Microsoft may delay or cancel certain AI data center leases, Goldman Sachs remains optimistic about Microsoft and maintains its capital expenditure forecast for the company.

Wallstreetcn previously mentioned that Microsoft has canceled several leasing agreements with multiple private data center operators, involving a total power capacity of hundreds of megawatts. In response, Microsoft stated that the company will adhere to its capital expenditure plan of over $80 billion, while also acknowledging that it may strategically adjust or slow down infrastructure construction in certain areas.

Goldman's report seems to confirm the message Microsoft wants to convey: as a responsible capital allocator, Microsoft's investments in the AI field have always been cautious, focusing on long-term returns.

Goldman stated that Microsoft has strong capabilities across all layers of the cloud stack (applications, platforms, infrastructure), which allows it to fully benefit from the shift of generative AI from the infrastructure layer to the platform and application layers, which will be positive for long-term profitability.

Additionally, considering the following points, Goldman continues to be optimistic about Microsoft:

1. Microsoft has approximately $300 billion in remaining performance obligations (RPO);
2. AI revenue is expected to grow to $13 billion;
3. Commercial orders have increased by 75% year-on-year, and Microsoft has a mature market position in AI.

In summary, Goldman reiterated its buy rating for Microsoft, expecting a 22.5% upside potential for Microsoft's stock price, and maintained its estimates of $8.8 billion and $9.1 billion in capital expenditures for fiscal years 2025 and 2026, respectively.

Turning to Reasoning: The Key to Long-Term Profitability

Goldman stated that as capital expenditure growth slows and generative AI shifts from the infrastructure layer to the platform and application layers, Microsoft, as the only super cloud service provider with extensive commercial applications, can fully leverage this transition, which will be positive for long-term profitability.

Goldman added that Microsoft has strong market shares across all areas of the cloud layer, including applications, platforms, and infrastructure. Therefore, Goldman believes Microsoft is capable of capturing some long-term trends such as generative AI, public cloud consumption, SaaS, digital transformation, AI/ML, business intelligence/analytics, and DevOps.

Moreover, as Microsoft's cloud business reaches approximately $100 billion in annualized revenue, Microsoft's operating leverage will continue to drive growth in earnings per share (EPS), with EPS expected to double by fiscal year 2028