Why Microsoft stock is getting a top-pick stamp from this analyst

It could be time to kick the tires on Microsoft stock (MSFT) after a 12% first quarter beating.

RBC Capital Markets analyst Rishi Jaluria added the tech behemoth to his "Top Picks" list on Tuesday.

"We believe investors underappreciate the GenAI innovation Microsoft brings throughout the infrastructure and application layers, and view the recent underperformance of the shares as a buying opportunity," Jaluria wrote in a client note. "We believe that Azure growth can reaccelerate, driven by AI momentum, capacity continuing to come online, and the Azure 'AI halo effect' coming into play."

Reasons behind the bullish call include Microsoft being a market leader in enterprise software and public cloud through Azure. He expects Microsoft to maintain a low teens percentage compound annual growth rate (CAGR) from fiscal year 2025 to fiscal year 2026.

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He added that Microsoft is likely to enter new markets, such as hyperautomation, to drive its growth. Lastly, Microsoft's Office installed base will likely continue to expand.

Jaluria slapped Microsoft with a $500 price target (assumes 33% upside from current price levels) and an Outperform rating.

The $500 price target is about average among the sell-side analysts that cover Microsoft, according to Yahoo Finance data. Of the 58 analysts who publish research on Microsoft, 91% rate the stock a Strong Buy or Buy.

Microsoft's stock was the fourth-worst performer from the "Magnificent Seven" in the first quarter. Tesla (TSLA) led declines with a 38% drop, Nvidia (NVDA) fell 21%, Google (GOOG) declined 19%, and Amazon (AMZN) shed 14%.

The drivers behind the Microsoft sell-off in the first quarter are threefold.

First, investors have rotated out of large-cap tech names and into perceived safe-haven assets like gold and healthcare stocks with Trump tariff fears running rampant. Second, ever since DeepSeek's breakthrough development in January, investors have been concerned that AI investment will slow materially in 2025.

Microsoft has been an aggressive investor in AI infrastructure, most notably seen in its backing of OpenAI.

And lastly, Microsoft's fourth quarter left some things to be desired.

Microsoft’s Commercial Cloud segment sales, which includes cloud services sales, saw revenue rise 21% year over year to $40 billion. It was shy of Wall Street expectations of $41.1 billion. Microsoft's intelligent cloud business, which includes its Azure platform, saw revenue of $25.5 billion. Wall Street was anticipating $25.8 billion.