Buy Microsoft before earnings on rising cloud profitability, Morgan Stanley says

Key Points
  • Morgan Stanley predicts Microsoft's cloud business profit margin will rise to 50 percent this fiscal year from 45 percent last year.
  • The firm reaffirmed its $72 price target for Microsoft shares, representing 11 percent upside from Wednesday's close.
Satya Nadella, chief executive officer of Microsoft
Amit Madheshiya | Bloomberg | Getty Images

Investors should buy Microsoft shares because its improving cloud business will drive earnings above expectations in the coming year, according to Morgan Stanley, which reiterated its overweight rating on the technology company.

The firm has "high conviction into Q3. Top line acceleration (driven by Azure + O365), gross margin stabilization (improving cloud gross [profit] margins + LinkedIn), opex discipline, and aggressive share repurchases should drive improving EPS growth at MSFT," analyst Keith Weiss wrote in a note to clients Thursday. "With a forecasted mid-teen total return profile thru FY19, we remain buyers."

Microsoft is scheduled to announce fiscal third-quarter financial results on Apr. 27.

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