Wolfe Research on Monday reduced its price target on Microsoft to $525 from $570, attributing the change to accelerating memory price inflation that has led the firm to increase its fiscal 2027 capital expenditure estimate to $270 billion from $230 billion. The firm kept its Outperform rating.
Analyst Alex Zukin said that recent upward moves in memory pricing - including remarks tied to the latest quarterly report from a major memory supplier - were a primary reason Wolfe raised an already above-consensus capex forecast. Wolfe said the higher capex number is intended to reflect rising component costs for AI infrastructure.
The capex revision materially alters Wolfe’s cash-flow outlook for FY27. The firm now projects free cash flow of negative $17.4 billion for the year, a notable swing from its prior estimate of roughly $14.7 billion in positive free cash flow and about $48 billion beneath the consensus forecast of $31 billion.
Wolfe also reduced its FY27 gross margin projection to 63.1% from 64.0%, compared with a consensus margin estimate of 66.6%. Its FY27 earnings-per-share forecast was trimmed by 1% to $19.02, which Wolfe notes sits about 2% below consensus.
Despite the downward revisions to target and estimates, Wolfe signaled continued confidence in Microsoft’s longer-term opportunity tied to AI. The note states the firm "remains long-term bullish on MSFT's full-stack monetization approach to AI with Azure growth acceleration and rising Agent monetization potential." Wolfe projects Azure revenue growth of 41% in FY27 and 40% in FY28, pacing above consensus estimates of 40% and 38%, respectively.
Zukin also highlighted that Microsoft reported $11.5 billion in restricted investments last quarter related to a supplier agreement. Wolfe interprets this disclosure as a potential sign the company may have been locking in some component costs tied to memory, which could help mitigate a portion of the pricing pressure on infrastructure inputs.
Contextual note - The changes outlined by Wolfe emphasize a tension between rising input costs for AI infrastructure and continued revenue strength in cloud and AI-related software monetization. The firm’s updated forecasts reflect the financial impact of higher capex on cash flow and margin metrics even as Azure demand remains a growth driver.