03:20 PM EDT, 04/26/2024 (MT Newswires) -- Microsoft's ( MSFT ) fiscal 2025 operating margin guidance was "understandably down" amid higher-than-projected capital intensity, which likely supports the technology giant's multiyear artificial intelligence cycle, RBC Capital Markets said Friday.

The technology giant expects 2025 operating margins to be down roughly 100 basis points on an annual basis amid its "significant" cloud and AI investments, as well as a full-year of impact from its recent acquisition of videogame maker Activision Blizzard, Microsoft ( MSFT ) Chief Financial Officer Amy Hood said on an earnings conference call late Thursday, according to a Capital IQ transcript.

In the current three-month period, the company expects capital expenditures to grow "materially" from the prior quarter led by cloud and AI infrastructure investments, Hood told analysts, adding that the near-term AI demand is "a bit higher" than Microsoft's ( MSFT ) available capacity. The company expects 2025 capital expenditures to be higher than this year, she added.

"Given early days in a multiyear innovation cycle, capital intensity continues to climb higher," leading to the company guiding to an annual operating margin contraction, RBC analyst Rishi Jaluria said. The outlook is "unlikely to phase investors playing the long game," according to the note. Microsoft ( MSFT ) expects double-digit revenue and operating income growth in 2025, Hood said on the call.

For its fiscal third quarter, the company logged stronger-than-expected financial results as a double-digit gain in its cloud business helped boost overall revenue. The strength in its Azure cloud-computing platform was "broad-based, with AI contribution in-line, constrained a bit by capacity, and non-AI seeing new workload starts improve," Jaluria said.

RBC maintained its outperform rating and a $450 price target on the Microsoft ( MSFT ) stock. The shares were up 2.3% in Friday late-afternoon trade.

"It was a record third quarter powered by the continued strength of Microsoft Cloud, which surpassed $35 billion in revenue, up 23%," Chief Executive Satya Nadella said on the call. The company is seeing an acceleration in "large" Azure deals from leaders across industries, he added.

"Stepping back, a clear path to upside remains fast-forming with AI and core rebounding," RBC said.

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