Microsoft Oct 13

Rating Company Date 12 October 2026 Buy Microsoft North America Reuters Bloomberg Rating Buy United States MSFT.OQ MSFT US Price target (USD) 600.00 Price at 9 Oct -week range 542.07 – 1.46 TMT Software Valuation & Risks

F1Q Preview - Twin engine turbo Brad Zelnick Microsoft appears poised to deliver a third straight quarter of accelerating Research Analyst constant currency revenue growth combined with y/y operating margin expansion in F1Q27, driven by the dual growth engines of Azure and M365 Daniel Knauff Commercial Cloud on an OpEx base being sustained at much lower +MSD y/y. Research Associate And the result would likely be even stronger if not for outright y/y revenue declines expected in the newly formed Devices & Consumer segment and nearly Yash Kejriwal every higher-margin license based business line (Server Products, M365 Research Associate Consumer Products, Industry Products, Windows OEM and Gaming). An appreciation for the powerful combination and potential duration of faster topline + margin expansion is apparent in shares that following a strong T+1 move on last quarter's solid earnings have climbed a further ~19% over the past several Key changes months. Fundamentally, we see evidence of improving AI adoption among Price target (USD) 550 600 9%

Microsoft's 1P Apps user base and higher monetization rates across its stack more Source: Deutsche Bank broadly providing underlying support for shares to continue moving higher into calendar year end, while tactically for F1Q we think investors will be looking for a couple points of topline outperformance, guidance supportive of further acceleration through the year in buyside numbers, and reiteration of its commitment to remain FCF positive in FY27.

Our work and industry datapoints show ample opportunities for topline momentum to continue. For Azure, the market environment/pricing for GPUs appears to have improved meaningfully over the past several months, and Microsoft should further benefit from engineering efficiency gains that enable the monetization of assets at a higher rate on a like-for-like basis as well as the shift to more CPU & ancillary SW intensive agentic workflows. Our biggest question is on the ability to take advantage of these factors near-term given ongoing compute constraints ahead of the Vera Rubin ramp, a large existing backlog to service, and stated prioritization of AI capacity for 1P Apps, which under the new segmentation now includes GitHub Copilot. On the Apps side, we think the case for further acceleration in M365 Commercial Cloud is the strongest it has been in many quarters, on a combination of rising M365 Copilot attach rates, ongoing E5 and E7 upgrade momentum, core M365 price increases starting to flow through as of July and ramping GitHub Copilot consumption. Finally, we see drag from the newly formed Devices & Consumer segment easing as we move through FY27 against much easier comps. Bottom line, we are modeling further revenue growth acceleration for at least the next two quarters into the high-teens and see potential this could still prove too conservative.

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On the profitability front, pressure on gross margins from rising AI investment should continue to be offset by strong OpEx leverage with headcount exiting FY26 lower y/y. The one wild card for us is the impact of the newly extended accounting useful life for datacenter and building assets, which to date mgmt. has not quantified beyond citing that the change will have a "minimal benefit" to FY27 operating income. Our base case is that even with a F1Q beat, full year operating margin guidance is maintained at down <1pt y/y as we note historically the company has waited until F2Q results to pass through any upside to the full year view. Underlying all this…