There is a second in each nice comeback story the place somebody lastly says, “I told you so.”
Morgan Stanley (MS) is not fairly there but with Microsoft, but it surely’s getting shut. MS is heading into Microsoft’s (MSFT) third-quarter fiscal 2026 (Q326) earnings on April 29, 2026, with an chubby score and a freshly reaffirmed $650 worth goal, from the present $432.92.
The rationale behind the massive shift? Morgan Stanley argues that the market remains to be sleeping on some of the sturdy AI progress tales in enterprise tech.
The sentiment on the Avenue has been cautious, with capability constraints, questions on Copilot’s aggressive positioning towards standalone AI labs, and uncertainty about whether or not all that capital expenditure is definitely changing into returns. Morgan Stanley thinks that the narrative is about to shift.
“Our work suggests a shift in Copilot capabilities and adoption, leaving us positive on Microsoft’s platform opportunity,” the agency mentioned in its preview be aware. “Leading GenAI position remains underpriced at 20x CY27 EPS, framing an attractive risk/reward.”
That is a pointed assertion from one in every of Wall Avenue’s most influential tech analysts. And it units up Microsoft’s upcoming earnings print as a possible turning level for the way buyers take into consideration the inventory.
Morgan Stanley’s $650 Microsoft goal hinges on Azure progress
The centerpiece of Morgan Stanley’s bull case is not Copilot, and it is not margins. It is Azure, and particularly, whether or not Microsoft can ship the one-point beat above steerage that the financial institution says is each achievable and essential.
“This quarter, the Microsoft Cloud surpassed $50 billion in revenue for the first time, up 26% year-over-year, reflecting the strength of our platform and accelerating demand,” Microsoft CEO Satya Nadellasaid in the previous earnings call.
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Microsoft guided for Azure constant-currency growth of 37% to 38% in the third quarter of fiscal 2026. Morgan Stanley is confident in high-30s growth, citing strong channel checks, improving GPU capacity, and positive data from its Chief Information Officer survey.
The magic number investors are watching, according to the bank, is 39% constant-currency growth, one point above the high end of guidance.
That matters because Azure growth right now is governed by supply, not demand. The pipeline is full. The bottleneck is compute capacity. Specifically, the availability of AI server infrastructure is needed to fulfill what is already a committed backlog.
Microsoft’s own management acknowledged the dynamic
On the Q226 earnings call, Microsoft’s CFO noted that the mix of short-lived assets, primarily GPUs and CPUs, would remain at roughly two-thirds of total capital expenditure as the company works to close the gap between demand and supply.
“Next, we expect capital expenditures to decrease on a sequential basis due to the normal variability from cloud infrastructure buildouts and the timing of delivery of finance leases. As we work to close the gap between demand and supply, we expect the mix of short-lived assets to remain similar to Q2,” mentioned Microsoft CFO Amy Hood.
The ahead indicators already in hand are putting. In keeping with Morgan Stanley’s be aware, primarily based on Microsoft’s most up-to-date outcomes:
- Remaining efficiency obligations (RPO) grew 110% yr over yr to roughly $625 billion.
- Present RPO (cRPO) grew 39% year-over-year (YoY) in fixed foreign money.
- Azure delivered 38% constant-currency progress, one level forward of steerage.
In reality, these numbers body an organization with a requirement drawback most enterprises would envy.
In Q226 outcomes, Microsoft Cloud surpassed $50 billion in income for the primary time, up 26% yr over yr.
Bloomberg through Getty Photographs
Microsoft says Copilot narrative is simply getting began
If Azure is the engine, Copilot is the story Wall Avenue hasn’t absolutely purchased but. Microsoft closed Q226 with 15 million paid Microsoft 365 Copilot seats, in response to MSFT’s earnings name. That was a brand new key efficiency indicator the corporate launched final quarter.
Morgan Stanley is watching carefully for indicators that utilization is accelerating and that adoption is spreading throughout Microsoft’s broader put in enterprise base. The framing issues right here. Morgan Stanley describes Copilot as more and more being seen by enterprise prospects as a “coworker,” a unifying layer throughout workflows slightly than a discrete AI characteristic.
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That repositioning, if it holds, adjustments the income dialog from seat depend to workflow penetration. It additionally instantly solutions the aggressive risk from standalone AI labs that has weighed on sentiment.
CIO survey knowledge from Morgan Stanley’s April 2026 report, in response to Investing.com, reinforces the constructive view. Chief info officers surveyed count on software program spending progress to speed up to 4.1% in 2026, up 32 foundation factors from the fourth-quarter 2025 studying, in response to Morgan Stanley.
Inside that constructive software program backdrop, Microsoft was recognized as the first beneficiary of sturdy cloud transformation tailwinds and rising GenAI funding.
Microsoft’s capital expenditure can also be rising quick
Not everybody on Wall Avenue is comfy with the size of Microsoft’s infrastructure spending. However Morgan Stanley is.
The agency raised its capex estimates, pointing to greater prices for reminiscence and server parts, however emphasizes that a lot of the spending is tied to near-term, revenue-generating property like GPUs and CPUs, supported by a $625 billion RPO backlog. This implies it’s backed by contracted demand slightly than hypothesis.
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Morgan Stanley expects working expense self-discipline to assist offset margin stress, projecting high-teens working earnings progress by fiscal 2026.
On valuation, the financial institution argues Microsoft’s present a number of of round 20 instances its 2027 EPS estimate of $20.92 doesn’t absolutely mirror its long-term progress potential, making the inventory a beautiful threat/reward alternative in large-cap tech.
What Microsoft’s Q326 earnings outcomes must ship
Morgan Stanley laid out the exact situations it believes are essential to maneuver MSFT shares meaningfully greater after the print.
In keeping with the agency’s preview be aware, buyers will probably be looking forward to:
- Azure constant-currency progress of a minimum of 39% in fiscal third-quarter 2026, a one-point beat above the excessive finish of steerage.
- Fourth-quarter Azure steerage within the low-to-mid 30s in fixed foreign money, reflecting a mid-single-digit deceleration from the third quarter because of a harder year-over-year comparability.
- Constructive commentary on capability provide and GPU allocation timelines.
- Proof of accelerating Copilot utilization and adoption momentum past the 15 million paid seat baseline.
- Capital expenditure steerage that alerts continued funding with out spooking buyers on near-term margin affect.
A miss in any of those, and the cautious sentiment that has stored the inventory range-bound might persist. Ship on the mixture, and Morgan Stanley believes the market will start repricing Microsoft’s AI monetization story, one which the agency says has been undervalued for lengthy sufficient.
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