Microsoft (MSFT.US) Earnings Preview: Morgan Stanley Optimistic About Azure Growth Accelerating to 47%, Maintains $600 Target Price

According to Zhitong Finance APP, on Monday, Morgan Stanley stated in its latest research report that with strong ongoing demand for cloud computing, continuous expansion of data center capacity, and the accelerated commercialization of Microsoft 365 and Copilot, Microsoft (MSFT.US) is expected to maintain its growth momentum in the first quarter of fiscal year 2027. The firm forecasts that Azure cloud business revenue growth, measured at constant currency, could reach about 47% year-over-year—above the upper end of the company's previous guidance range—and maintains its "Overweight" rating on Microsoft with a target price of $600.

Based on Microsoft’s closing price of $529.05 on October 16, Morgan Stanley’s target price is about 13.4% higher than the current stock price. The firm believes that despite the recent share price uptick raising expectations ahead of the upcoming earnings release, cloud business growth, AI product commercialization, and long-term profitability improvements continue to support the stock price.

Morgan Stanley points out that Azure is the segment to watch in Microsoft’s financial report. Previously, Microsoft guided for 44–45% year-over-year revenue growth in Azure (constant currency) for the first quarter of fiscal 2027, and Morgan Stanley considers that an actual growth of about 47% would provide positive support for the stock price. However, rather than a single quarter’s performance, investors are more concerned about whether Microsoft can sustain this growth level into Q2.

The firm believes Azure’s growth momentum is driven by traditional cloud business together with AI workloads. On one hand, enterprises continue migrating applications and data to the cloud, boosting core Azure business demand; on the other, AI model inference, agent applications, and related infrastructure services are becoming new sources of revenue growth.

Data center capacity constraints faced by Microsoft in recent quarters are also expected to gradually ease. Morgan Stanley estimates that Microsoft will add about 3.25GW of new data center capacity in fiscal 2026, and a further 4.25GW in fiscal 2027. As new infrastructure comes online, Microsoft will be better able to meet previously constrained customer demand and convert AI investments into actual revenue.

The latest Morgan Stanley CIO survey shows that Microsoft remains the biggest beneficiary of IT budget share growth as enterprises migrate workloads to the cloud. In 2026, Microsoft’s net score in the survey reached 43%, compared to Amazon’s 26%. Meanwhile, respondents expect AI and machine learning to increase their share of public cloud spending from the current 3.8% to 9.9% over the next three years.

Aside from Azure, the commercialization progress of Microsoft 365 and Copilot is also worth noting. Morgan Stanley expects that in the first quarter of fiscal 2027, Microsoft 365 commercial cloud business revenue growth (constant currency) could reach 17% or higher year-over-year.

The firm’s recent channel checks show that enterprise clients are continuously upgrading from Microsoft 365 E3 to the higher-priced E5 package, mainly driven by information security features. As enterprises place more importance on identity management, endpoint security, and data protection, Microsoft is expected to boost average revenue per user through higher-tier subscription packages. Meanwhile, initial market interest in the E7 package also presents new possibilities for future revenue growth.

For AI office products, Morgan Stanley notes that enterprise adoption of Copilot is improving. In the fourth quarter of fiscal 2026, Microsoft added about 10 million paid seats for Microsoft 365 Copilot, and the firm expects this momentum to continue.

Recently, Microsoft has also integrated Chat, Cowork, Code, and Autopilot agents into a unified Copilot experience, gradually transitioning from traditional user-based subscription models to pricing based on actual usage.

However, Morgan Stanley believes that Copilot’s usage-based monetization is still in early stages. Enterprises need to further develop AI usage budgets and cost control mechanisms, and validate the return on investment from these tools. Therefore, in the short term, Copilot revenue growth will mainly rely on the increase in paid subscriptions and higher-end product penetration, while revenue from increased agent usage is expected to materialize over time.

Survey data also shows strong enterprise willingness to purchase AI products. Morgan Stanley’s Q3 CIO survey found that 30% of respondents expect Microsoft to capture the largest share increase in generative AI spending by 2026, up from 27% the previous quarter. Another 64% of respondents prefer to directly purchase external AI products and services rather than develop them in-house.

In terms of profitability, Morgan Stanley expects Microsoft’s continued investments in AI infrastructure will place pressure on gross margins, but strict control of operating expenses and improvements in internal efficiency are likely to offset most of the impact.

The firm estimates Microsoft’s overall gross margin will decline by about 2 percentage points year-over-year to 65.8% in fiscal 2027, but operating profit margin will only slightly decrease to 46.6%. Previously, Microsoft expected operating expenses for 2027 to grow in the mid-to-high single digits, significantly lower than revenue growth, supporting profit expansion.

Meanwhile, AI technology itself is also helping Microsoft reduce operating costs. Management previously stated that internal AI applications have saved the customer support business hundreds of millions of dollars annually, and similar measures are being extended to sales operations and finance departments.

Infrastructure operation efficiency has also improved. Based on previous management disclosures, Microsoft reduced the time required for data center equipment from deployment to revenue-generating capability by more than 50% over the past year. Morgan Stanley believes this will help the company more rapidly unlock new capacity and improve return on investment for AI infrastructure.

However, Microsoft’s capital expenditure could continue to rise. The company previously anticipated over $50 billion in capital spending for the first quarter of fiscal 2027, and Morgan Stanley believes that actual expenditures could exceed expectations given ongoing supply-demand gaps for Azure and AI businesses.

The firm emphasizes that investors’ focus is shifting from the absolute scale of capital expenditures to how quickly new data center capacity can be deployed and begin generating revenue. Despite the massive scale of AI investments, Microsoft expects to achieve positive free cash flow in fiscal 2027. Morgan Stanley believes Microsoft’s strong profitability, balance sheet, and financing channels enable it to continue supporting AI infrastructure construction.

Financial forecasts from Morgan Stanley see Microsoft’s Q1 FY27 revenue at about $90.243 billion, up 16.2% year-over-year, slightly below the consensus estimate of $90.639 billion; operating profit is projected at $43.968 billion, roughly in line with expectations; GAAP EPS is forecast at $4.73.

For the full year, the firm expects Microsoft’s FY27 revenue to reach about $392.342 billion, an 18.2% year-over-year increase, and further grow to $481.116 billion in FY28, up 22.6%. Notably, Azure and other cloud services revenue is expected to grow from $147.188 billion in fiscal 2027 to $210.028 billion in fiscal 2028.

It is worth noting that starting with Q1 FY27, Microsoft will adjust its business reporting structure from three segments to two: “Agents & Infrastructure” and “Devices & Consumers.” For the first time, Azure revenue will be disclosed as a standalone quarterly metric. Morgan Stanley believes this will give investors greater transparency into Azure growth and Microsoft 365 commercial cloud business performance.

From a long-term competitive perspective, Morgan Stanley believes Microsoft’s edge in AI is no longer limited to a single model, but spans cloud infrastructure, enterprise data management, model and agent development platforms, and office applications. As enterprises gradually adopt AI models from different vendors, Microsoft still has opportunities to generate revenue via Azure, Fabric, Foundry, and Copilot.

Additionally, Microsoft plans to begin deploying its self-developed Maia 300 AI chips in 2027. Morgan Stanley believes that while this chip may not significantly impact Azure revenue in the short term, over the long term it is expected to improve AI inference efficiency, reduce dependency on third-party GPUs, and enhance AI infrastructure profitability.

In terms of valuation, Morgan Stanley notes that Microsoft’s current forward 12-month P/E is about 27x, still below its historical average of around 28–29x. Considering the firm expects Microsoft’s EPS to sustain over 20% growth after FY27, the current valuation remains attractive.

The firm maintains its $600 target price for Microsoft, equating to about 25x its projected FY28 EPS. In an optimistic scenario where Azure growth accelerates further and Copilot commercialization beats expectations, Microsoft’s share price could reach $795; however, if the macroeconomic environment weakens, enterprise IT spending slows, or AI adoption lags, company growth and valuation could come under pressure.

Morgan Stanley believes whether Microsoft’s upcoming earnings report can drive the share price higher depends mainly on whether Azure’s growth exceeds previous guidance and if management can demonstrate that this momentum will persist in subsequent quarters. As data center capacity expansion and AI commercialization progress reinforce each other, Microsoft is still expected to maintain strong revenue and profit growth over the coming years.