Morgan Stanley: The potential positive impact of Microsoft's investment in OpenAI has not yet been priced in, reiterating an "Overweight" rating

According to Zhitong Finance APP, Morgan Stanley released a research report indicating that the rapid growth, scale, and valuation of OpenAI have not yet been fully recognized by investors in relation to Microsoft. The firm pointed out the conservativeness of Azure's forecasts, supporting significant growth in earnings per share for fiscal year 2027, and emphasized the attractive risk/reward profile of Microsoft. Morgan Stanley has given Microsoft an "Overweight" rating with a target price of $482.

Morgan Stanley's equity, global valuation, accounting and tax (GVAT), and U.S. enterprise software teams conducted an in-depth study on the following issues: 1) the impact of equity method accounting on Microsoft's evolving partnership with OpenAI; 2) the conservativeness and upside potential of Azure AI (and Azure) valuations in Morgan Stanley's model; 3) the underestimation of accelerated future earnings per share, and the overlooked true value of Microsoft's equity investment in OpenAI.

While investors are still discussing the "return on investment" from rising capital expenditures, Morgan Stanley believes that Microsoft's investment returns in generative AI are becoming increasingly evident, both in terms of direct monetization and in driving broader portfolio IT wallet share growth. This leading position, matched with solid execution, is accelerating the growth of Azure's business during the upcoming generative AI innovation cycle, and top-notch capital discipline well supports Morgan Stanley's forecast of approximately 15% compound annual growth rate for earnings per share.

The 28 times GAAP earnings per share multiple for 2026 (with a PEG of 2.0 times) fails to reflect Microsoft's strong positioning and enduring earnings per share growth potential, thus Morgan Stanley has given Microsoft an "Overweight" rating.

Impact of equity method accounting on evolving partnerships. Microsoft's investment in OpenAI is accounted for at cost; subsequently, Microsoft's share of losses in OpenAI (included in net profit) decreases. OpenAI's losses will continue to weigh on Microsoft's earnings per share until it becomes profitable or reaches the $13 billion cap (total investment value). As the partnership evolves, the accounting treatment of transactions between Microsoft and OpenAI may change.

Azure AI has growth momentum against the backdrop of OpenAI's rapid growth. Given OpenAI's rapid growth, Morgan Stanley believes there is upside potential in the valuation of Azure AI, confirming the upside highlighted in its Azure AI analysis based on capital expenditure assumptions, and increasing Morgan Stanley's confidence in Azure's continued acceleration. In the firm's forecasts, OpenAI's growth accounts for 49% of Azure AI growth in 2025, and Azure AI could grow by over 100% in 2026, indicating that next year's growth forecast for Azure AI has not yet been reflected in Morgan Stanley's model. In other words, Morgan Stanley maintains its assumptions regarding OpenAI-related revenue, and if the "other" portion of Azure AI revenue grows by 50% in the first half of 2026 (compared to 129% growth in the first half of 2025), it will drive Azure's overall revenue to maintain a 35% year-over-year growth in 2026, far exceeding the current year-over-year growth expectation of 27.5% Microsoft's current trading price is below that of its peers. Microsoft's earnings per share growth is expected to accelerate by 2027, as the losses related to OpenAI will disappear once Microsoft amortizes its entire initial investment. This is not reflected in today's price-to-earnings ratio, as Microsoft's stock price is below that of its peers regardless of whether adjustments related to OpenAI's drag are made. Morgan Stanley believes that investors should value the stock excluding the impact of OpenAI accounting losses and see the potential for Microsoft's stock to narrow the valuation gap on a GAAP PEG basis excluding OpenAI losses (currently trading at 1.7 times, while the average for large-cap stocks is 1.9 times). Thus, the value of Microsoft's equity stake in OpenAI still has room for growth