Microsoft July 30

Rating Company Date 30 July 2026 Buy Microsoft North America Reuters Bloomberg Rating Buy MSFT.OQ MSFT US Price target (USD) 550.00 United States Price at 29 Jul -week range 542.07 – 1.46 TMT Software Valuation & Risks

F4Q - Harnessing the Power of AI Brad Zelnick Microsoft reported very strong F4Q results that underscore its full-stack Research Analyst advantage in the AI era, with strong evidence of monetization up through the application layer featuring M365 Commercial Cloud acceleration including Bhavin Shah, CFA Copilot reaching 30mn seats from 20mn last quarter. Another clear message is Research Analyst that the future is very much multi-model and the frontier is about every firm having the flexibility and choice to control its destiny; Microsoft enables this with Daniel Knauff the broadest model catalog in the cloud and associated scaffolding and Research Associate guardrails enterprises require. The quarter evidenced that production AI applications rely on harnesses, context, memory and action space, architected in a way that any given model at any given time is swappable. Aligning with the Yash Kejriwal Research Associate durable role Microsoft plays, we found it interesting that mgmt. framed its success and various growth metrics ex the contribution from frontier model companies.

Azure +43% y/y @cc exceeded ~40-41% investor expectations, driven by efficiency gains across the CPU/GPU fleet and process improvements that enabled earlier delivery of new capacity which was quickly monetized. Results also benefited from stronger than expected GitHub Copilot consumption revenue following the June business model change to consumption pricing. Very impressively, Azure was guided to accelerate in F1H and +45% y/y @cc in F1Q, which implies $2.8bn net adds (+65% y/y) and is consistent with commentary implying accelerating demand. With CapEx continuing to climb in F1H and more weighted toward short-lived assets in recent quarters, this looks supportive for elevated Azure growth rates to persist for multiple quarters to come.

For the full year, mgmt. reiterated total company guidance for double-digit topline and EBIT growth, with operating margins down <1pt y/y. This was slightly better than the -1pt y/y decline we previewed despite guidance for sharper FY27 revenue declines in high margin Windows (-high-teens % y/y), M365 Commercial Products (-MSD %) and Server Products (-MSD %). Factoring in updated guidance, our FY27 GM estimate eases only a slight ~10bps to 65.8% which we believe supports our view that Microsoft has a number of levers to help partly offset margin headwinds from mix shift and higher component costs as we laid out in our Margins under the Microscope report. As for CapEx, the lease reclassification impact from useful life changes on long-lived assets creates some noise, but on a like-for-like basis we understand there is no change to prior CY26 investment plans. Beyond that, mgmt. essentially held off on giving a view on F2H plans outside the expectation for FY27 FCF overall to remain positive.

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We come away reaffirmed in our view that Microsoft is poised to continue compounding EPS at a mid-teens+ rate for multiple years to come on the back of increasingly tangible AI monetization across its full-stack. Accelerating Azure and M365 growth along-side resilient operating margins should build confidence in the returns on CapEx and R&D investment going into the business and Microsoft's position as a key facilitator of enterprise wide AI value creation. We maintain our Buy rating and target price of $550, which implies ~25x our updated CY27E EPS.

What We Liked / What We're watching on the Quarter Revenue/Bookings

(+) F4Q revenue of $90.0bn was 3.2% above the midpoint of guidance, with upside across…