Key Points
- Gross margin, declined 67.6%, its lowest level since 2022, driven by higher depreciation costs from accelerated data centre infrastructure expansion.
- Annualised AI-related revenue has reached USD 37 billion, up 123%, including revenue from clients running AI workloads on Azure, model builders, and Microsoft’s own AI products.
- Microsoft has revised its longstanding partnership with OpenAI, ending revenue-sharing payments. Under the new arrangement, any cloud provider can host OpenAI models, ending Azure’s exclusivity.
- Our conviction in Microsoft remains intact, supported by its strategic positioning across the AI value chain. As such, we reiterate a BUY rating on Microsoft with a target price of USD 560.
- Microsoft reported better-than-expected quarterly results, with revenue growing 18% year-on-year (vs 16% expected), and earnings rising 23% year-on-year (vs 17% forecast)
Microsoft reported better-than-expected quarterly results, with revenue growing 18% year-on-year (vs 16% expected), and earnings rising 23% year-on-year (vs 17% forecast). Gross margin, however, declined 67.6%, its lowest level since 2022, driven by higher depreciation costs from accelerated data centre infrastructure expansion.
Cloud Segment as the Primary Growth Driver
The broader Intelligent Cloud segment grew 30% during the quarter, exceeding estimates, driven by stronger growth in Azure. Benefiting from robust AI demand, Azure and other cloud services saw growth reaccelerate to 40% year-on-year (39% in constant currency), up from 39% in the previous quarter when some capacity had been allocated to internal AI Copilot usage. This suggests incremental capacity coming online to meet sustained AI-driven demand.
Operating margin for the cloud segment declined to 40%, down from 42% in the previous quarter, due to rising depreciation costs associated with data centre build-out. This diverge from peers, where margins have generally improved (e.g. Amazon and Alphabet Inc.), highlighting Microsoft’s heavier near-term investment phase.
Microsoft’s commercial remaining performance obligations (RPO) stood at USD 627 billion (+99% y/y), reinforcing strong forward revenue visibility, particularly in AI-related workloads.
AI-related revenue shows notable growth
Annualised AI-related revenue has reached USD 37 billion, up 123%, including revenue from clients running AI workloads on Azure, model builders, and Microsoft’s own AI products. Management indicated that weekly engagement with its built-in AI tools is now at levels comparable to Outlook. Meanwhile, Microsoft Copilot is starting to show up in segment numbers. Microsoft now has over 20 million seats for its Microsoft 365 Copilot AI add-on for commercial Office subscriptions, up from 15 million in January. Commercial bookings increased 112% in the quarter, significantly ahead of expectations.
Copilot is monetizing across two surfaces: productivity and developer tools. Adoption appears driven by deeper Copilot’s integration, including Anthropic’s Claude model through the Copilot CoWorker feature, launched in late March 2026.
Further improvements will depend on enterprise seat expansion and sustained developer adoption via GitHub Copilot.. The other driver is that GitHub Copilot continues to add paid users at the developer level.
Table 1: Key financial metrics
|
Metric / Segment |
Actual |
YoY |
Consensus Estimate |
Beat / Miss |
Q4 FY2026 Guidance |
|
Key financials |
|||||
|
Total Revenue |
$82.9B |
+18% (+15% cc) |
$81.4B |
Beat +$1.5B |
~$86–87B (implied) Segments sum to ~$86.7–87.8B Below consensus of $ 87.53B |
|
EPS (diluted, adj.) |
$4.27 |
+23% |
$4.06–4.07 |
Beat +5% |
— |
|
Operating Income |
$38.4B |
+20% |
~$36.8B |
Beat |
Op. margin ~44%, vs. 46.3% Q3 and 44.6% est. |
|
Gross Margin % |
67.6% |
▼ YoY |
~68–69% |
Miss Lowest since 2022; AI infra costs |
— |
|
Cloud Gross Margin % |
66% |
▼ YoY |
~65% (guided) |
Beat |
~64% Guided lower; AI investment pressure |
|
Net Income |
$31.8B |
+23% |
— |
Beat |
— |
|
Free Cash Flow |
$15.8B |
— |
— |
Note Compressed by elevated capex |
— |
|
Business segments |
|||||
|
Intelligent Cloud |
$34.7B |
+30% |
$34.3B |
Beat |
$37.95–38.25B +27–28% YoY |
|
Azure & Cloud Services |
+40% growth |
+40% (+39% cc) |
~39% |
Beat |
+39–40% (cc) Reacceleration expected H2 CY26 |
|
Productivity & Biz Processes |
$35.0B |
+17% |
$34.4B |
Beat |
$37.0–37.3B +12–13% YoY |
|
M365 Commercial Cloud |
+19% growth |
+19% |
— |
Beat 20M+ Copilot seats |
+15–16% (cc, adj.) |
|
More Personal Computing |
$13.2B |
-1% |
~$13.7B |
Miss Weak hardware & Xbox |
$11.75–12.25B Further softness expected |
|
AI Revenue Run Rate |
$37B ann. |
+123% |
— |
Highlight |
— |
|
Capital expenditure |
|||||
|
Quarterly Capex (incl. leases) |
$31.9B |
+49% YoY |
$34.9B (Visible Alpha) |
Below est. $3.4B undershoot — positive signal |
>$40B guided Incl. ~$5B from higher component costs |
|
Full-Year CY2026 Capex |
$190B (guidance) |
+61% vs. CY2025 |
$154.6B (Visible Alpha) |
Far above est. Incl. $25B from memory price surge |
$190B maintained Demand constrained through end of 2026 |
Source: Company announcements. Street estimates. Data as of 30 April 2026.
OpenAI Relationship: From Exclusive to Priority
Microsoft has revised its longstanding partnership with OpenAI, ending revenue-sharing payments. Under the new arrangement, any cloud provider can host OpenAI models, ending Azure’s exclusivity. Microsoft retains a non-exclusive licence to OpenAI’s intellectual property for the next six years.
This shift reflects Azure’s transition towards a multi-model strategy, reducing reliance on OpenAI (which accounts for approximately 45% of Microsoft’s cloud backlog). While this may reduce earnings visibility, it allows Microsoft to diversify its customer base, lower concentration risk, and strengthens Microsoft’s multi-model positioning, which could support long-term monetisation.
Moderate performance across other segments
Revenue from Microsoft’s Productivity and Business Processes segment reached USD 35.01 billion, representing approximately 17% y/y growth and exceeding analyst expectations of USD 34.43 billion. While growth was moderate, it helps alleviate concerns that AI could cannibalise Microsoft’s core business model and its revenues.
Guidance slightly below expectation
Microsoft guided revenue for the next quarter in the range of USD 86.7 billion to USD 87.8 billion (midpoint: USD 87.25 billion), slightly below consensus, suggesting either conservative guidance or early signs of moderating growth momentum.
Operating margin is expected to decline to 44%, below expectations of 44.6%, due to higher depreciation and elevated capital expenditure. On a more positive note, Azure cloud growth is projected at 39%–40% in constant currency, above the 37% consensus.
CAPEX unexpectedly moderated, but full-year guidance raised materially
Microsoft reported USD 31.9 billion in capital expenditure and finance leases for the quarter, up 49% year-on-year but below the USD 34.9 billion consensus, marking the slowest growth since 2Q25.
However, the company raised its full-year 2026 CAPEX guidance to USD 190 billion (well above prior expectations), up 61% from 2025 and significantly above our previous estimate of USD 135 billion, implying continued investment intensity despite near-term moderation. Free cash flow improved to USD 15 billion quarter-on-quarter but remained down 22% year-on-year.
Reiterating BUY on Microsoft
Overall, Microsoft delivered a solid quarter, but not a clean beat-and-raise, less surprising particularly when compared with stronger performances from Amazon (with strong AWS reacceleration) and Alphabet Inc. (with robust Google Cloud growth of 63%).
The combination of higher capital expenditure, strong but stabilising cloud growth, and margin pressure may weigh on near-term investor sentiment. Nevertheless, our conviction in Microsoft remains intact, supported by its strategic positioning across the AI value chain — including Microsoft 365 as the primary deployment platform for Copilot, Azure as a key beneficiary of rising AI compute demand, and its 27% stake in OpenAI, which provides priority access to one of the leading AI model ecosystems. In addition, the company has one of the strongest balance sheets among peers.
Nevertheless, our positive view on Microsoft remains intact. Importantly, supply, not demand, remains the binding limit, reinforcing the durability of underlying AI demand.
We forecast forward earnings for FY26 to grow by 23%, followed by 13% and 17% for FY27 and FY28, respectively. Applying our fair P/E of 25x, justified by sustained double-digit earnings growth and structural AI exposure, it implies an upside potential of 32%.
As such, we reiterate a BUY rating on Microsoft with a target price of USD 560 by 2028.
Table 2: Valuation Table
|
2025Y |
2026Y |
2027Y |
2028Y |
|
|
P/E |
36.36 |
25.2 |
22.2 |
19.0 |
|
Earnings |
13.68 |
16.82 |
19.09 |
22.38 |
|
Earnings Growth |
24.29% |
23% |
13% |
17% |
|
Sales (bil USD) |
281 |
328 |
380 |
442 |
|
Sales Growth |
14.9% |
16.7% |
15.9% |
16.3% |
|
Fair PE |
25 |
|||
|
Target Price |
414.44 |
560 |
||
|
Upside Potential |
35% |
|||
|
Source: Bloomberg Finance L.P., iFAST compilations. Data as of 01 May 2026. |
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