msft

Microsoft's latest earnings report might keep short sellers awake all night.

Morgan Stanley released a forward-looking analysis for Microsoft's Q4 2026 earnings, taking an extremely firm stance. The core message is simple: market concerns about Azure are unfounded.

Let's talk about Azure first.

The market worries that growth has peaked, but Morgan Stanley slammed the table on this: they expect Azure's constant-currency growth in Q4 to reach 41%, exceeding the company's own guidance upper bound of 39-40%. How? Core Azure stabilizes at 26%, plus an additional 19 percentage points contributed by AI. Crucially, the "capacity constraints" that have been bottlenecks are easing, and investments in AI infrastructure are starting to translate into tangible revenue, not just burning cash with no results.

Next, Copilot.

The business model is evolving—it's no longer purely SaaS subscription, but a hybrid of "base seat fees + consumption-based billing." Three growth engines are turning simultaneously: seat counts continue to rise (expected to exceed 20 million), customers are upgrading to higher-priced E7 versions, and consumption-based billing driven by Agents is increasing. Coupled with the comprehensive M365 price hike implemented on July 1st, Morgan Stanley calculates that ARPU will increase by $12 over the next three years. This isn't a one-time revenue pulse; it's a sustained structural improvement.

What about the capital expenditures that worry the market most?

Wall Street is still debating whether Capex will spiral out of control, but Morgan Stanley says there's no need to panic. Two-thirds of the spending goes into short-term assets like GPUs/CPUs, directly tied to revenue in the coming quarters, rather than being those far-off long-term pie-in-the-sky promises. Morgan Stanley built its own model, concluding that as long as gross margins remain above 20%, the potential for AI revenue far exceeds Wall Street's current conservative forecasts.

And valuation?

The current stock price corresponds to roughly a 16x PE based on FY28 GAAP EPS. For a company with a 16x PE and growth exceeding 20%, Morgan Stanley says it is significantly undervalued, with a target price of $600, implying a 50% upside. Regarding earnings guidance, the operating margin guidance for FY27 is expected to "slightly decrease or drop by 1%," but in actual execution, expansion is highly likely—management's habitual tactic of "starting low and ending high."

To summarize Morgan Stanley's logic chain:

Azure beats expectations → Copilot commercialization accelerates → Capex efficiency validated → Margin resilience exceeds expectations → Valuation repair