Investing.com -- After downgrading Amazon (NASDAQ:AMZN) this week, Wells Fargo (NYSE:WFC) said it is increasing its Microsoft (NASDAQ:MSFT) position, recommending investors focus on the tech giant as part of its "Signature Picks" portfolio.
The shift follows limited visibility for Amazon's future estimate revisions, while Microsoft shows strong momentum in its cloud and AI services, according to Wells Fargo analysts.
The bank removed Amazon from its Signature Picks portfolio after the downgrade, which cited challenges in the company's outlook.
While Amazon had delivered a solid performance, rising 40% since reintroduction into the portfolio in July 2023, Wells Fargo's Ken Gawrelski highlighted the "limited visibility into further positive estimate revisions" as a reason for the downgrade.
In contrast, Wells Fargo has increased its position in Microsoft, raising the allocation from 3.9% to 8.9%.
The bank's analysts are optimistic about Microsoft's Azure platform and its AI capabilities. The report highlighted positive Azure checks with partners finishing above plan for Azure in the recent quarter, driven by strong demand in cloud migration, modernization projects, and AI workloads.
"Stronger-than-usual checks suggest underlying Azure momentum continuing; expect shares benefit as more model clarity surfaces through FY25," said the bank.
Azure growth is expected to accelerate with 33% year-over-year growth in Q1, including 12 points from AI, Wells Fargo stated.
Additionally, Microsoft's rollout of Copilot, its AI-powered productivity tool, is expected to gradually drive adoption and long-term revenue, even though it's still in the early stages.
Wells Fargo has a price target of $515 for Microsoft, reflecting a premium based on its significant scale and favorable long-term growth prospects.
The report pointed out that the current capex investments in AI would continue to impact free cash flow multiples, but long-term earnings growth remains robust.
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