LinkedIn Just Cut Its Israel R&D Team. Microsoft Stock Investors Shouldn’t Sweat the Layoffs.

Microsoft (MSFT) shareholders got another reminder this week that even the biggest tech players are watching expenses but are pouring billions into AI investments. The company's social network site LinkedIn is reported to be shutting down its research and development center in Israel and laying off nearly all the center's roughly 50 employees.

The Tel Aviv center opened only in 2022 when Microsoft acquired the Israeli analytics startup Oribi for an estimated $80 million to $90 million and incorporated the company's technology into LinkedIn Marketing Solutions. This number laid off is small compared to Microsoft's huge workforce, but the timing is rather interesting. On the one hand, Microsoft is increasing the budget for AI infrastructure. But on the other hand, the company is trying to find areas where expenses can be cut. That is why the move to shut down the LinkedIn center is not so much a signal about the lack of demand, but an example of resource allocation by Big Tech.

About Microsoft Stock

The American multinational technology corporation Microsoft Corporation, headquartered in Redmond, Washington, provides products and services that cover cloud computing, enterprise software, productivity applications, video games, advertising, and AI solutions. With a market capitalization of approximately $3.69 trillion, Microsoft is still one of the most valuable publicly traded firms in the world.

MSFT stock trades at about $485, which is approximately 12% lower than the 52-week high of $553.72 and nearly 39% above the 52-week low of $349.20. At the same time, the S&P 500 Index ($SPX) is up by approximately 14% year-to-date (YTD) as of Aug. 17.

Microsoft's valuation leaves little space for any mistakes. The stock is traded at approximately 25 times forward earnings and 11 times sales. These are rather expensive valuations, but Microsoft's 40.3% profit margin and 32% return on equity explain why such valuations are acceptable. What is much more important, however, is that Azure and AI are still driving growth.

It should also be noted that the cuts in LinkedIn will be better understood considering the performance of the business. The revenues at LinkedIn increased 12% year-over-year (YoY) during Microsoft's fiscal fourth quarter. The shutdown of the center with around 50 employees while the business is still growing looks like operational streamlining rather than deterioration of the business itself.

Beats on Earnings

The quarterly report of Microsoft proved to be a much more informative source regarding the company's development plans compared to the decisions concerning LinkedIn. Revenues increased by 18% YoY to $90 billion, beating the consensus estimate of $87.44 billion by approximately 3%. The non-GAAP EPS rose by 23% to $4.74, well exceeding the consensus estimate of $4.21.

These figures look even more impressive when considering the numbers behind them. Microsoft Cloud revenues increased by 27% to $59.3 billion, while Azure and other cloud services' revenues increased by 43%. Commercial remaining performance obligations reached $678 billion, up 84%, meaning a significant degree of revenue visibility for the company. In addition, Microsoft 365 Copilot surpassed 30 million paid seats.

The management sees fiscal Q1 2027 revenue of between $89.85 billion and $90.95 billion, while Azure growth is expected to be approximately 45% in constant currency. Moreover, Microsoft expects another year of double-digit revenue and operating income growth.

This growth requires tremendous investments, however. Microsoft spent nearly $41 billion on capital expenditures, including leases, during Q4, as AI infrastructure is one of the main priorities for the firm. Thus, the cuts in LinkedIn can be considered as part of Microsoft's broader capital allocation strategy: the company is willing to invest aggressively where the returns are highest, while cutting the expenses in the area that may not justify further spending.

What Do Analysts Expect for MSFT Stock?

Wall Street analysts are highly optimistic about MSFT stock with a "Strong Buy" rating consensus from 51 analysts, with an average rating score of 4.73 out of 5. Analysts have a slightly cooler take on Microsoft's valuation, however. Microsoft's mean analyst price target of $554.76 implies the potential upside of approximately 14% from the current stock price of $485.17. The street-high target of $700 implies even greater upside potential, while the lowest target is $400.