Microsoft shares recover as Azure growth offsets rising AI investment costs

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Microsoft shares recover as Azure growth offsets rising AI investment costs

Azure and cloud business drive strong quarterly results

The main driver was once again the cloud business: Azure and other cloud services grew by 43%, while annual Azure revenue exceeded $100 billion for the first time. Microsoft Cloud generated $59.3 billion, up 27%, while Microsoft 365 Copilot has already surpassed 30 million paid seats. At the same time, More Personal Computing remains the weak link: segment revenue declined by 4%, including a 7% drop in Windows OEM and Devices and a 10% decline in Xbox content and services.

AI infrastructure spending becomes key investor focus

The key question now is not related to demand, but to the cost of serving it. Management directly stated that demand for Azure continues to exceed available capacity, so capital expenditures will increase in FY2027, while already in the next quarter capex is expected to exceed $50 billion. This intensifies the debate over how quickly investments in AI infrastructure will convert into cash flow and margins.

Proprietary chips could ease long-term cost pressures

So far, the results confirm the efficiency of the model: Microsoft expects to maintain positive free cash flow in FY2027, while the operating margin for the full year is expected to decline by less than 1 percentage point. An additional supportive factor is the focus on proprietary AI chips: the company is preparing Maia 300 and, according to reports, is discussing a large-scale production expansion with TSMC for 2027, which could potentially reduce dependence on external accelerator suppliers and help control computing costs.

Wall Street raises targets after strong earnings

Analyst forecasts improved noticeably after the report, although the range of estimates remains wide. Bernstein raised its price target to $660, considering concerns about excessive AI capacity expansion to be overstated, while Morgan Stanley earlier set a $600 target, betting on Azure, Copilot and deeper monetization of M365.

Valuation leaves less room for disappointment

Even after the rebound, the market values Microsoft at around 29.6x current earnings, so a sustainable continuation of the rally will require Azure to maintain high growth rates and a gradual improvement in returns on invested capital. The main risk is that large-scale commitments to data centers and infrastructure leasing will grow faster than the actual monetization of AI services, especially if corporate clients begin to optimize spending.

Middle East risks remain mostly operational

For Microsoft, the Middle East represents more of an infrastructure and operational risk than a direct revenue risk. The company continues to expand in the region and plans to open an Azure region in Saudi Arabia in Q4 2026, although in its 10-K it separately notes the dependence of data centers on stable power supply, network infrastructure, server components and logistics.

Any deterioration in the situation around the Persian Gulf could increase the cost of construction, insurance and power supply for new capacity, as well as delay infrastructure deployment.

Nevertheless, the fundamental picture for MSFT remains constructive for now, while the decline in MSFT’s price is currently limited by support near the $490 level, where demand may contribute to another test of resistance around $510-512.

A loss of support, as written in the article Microsoft slides toward $496 as sellers challenge strong AI-driven outlook, would lead to a decline toward $470-440, where buying interest may remain.

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