Morgan Stanley supports "AI leader" Microsoft ahead of Q4 earnings: Azure's high growth + Copilot's potential supports attractive risk-reward

According to Zhitong Finance APP, Morgan Stanley recently released a research report providing a forward-looking analysis of Microsoft's (MSFT.US) fourth fiscal quarter performance, believing that its current risk-return profile is attractive. The core logic lies in Microsoft's leading position in the artificial intelligence (AI) field, robust growth in core business, and operational efficiency advantages, which are expected to support a mid-to-high single-digit total return in the medium to long term. The rating on Microsoft is maintained at "Overweight," with a target price of $530.

Following a strong performance in the third quarter, investor sentiment has improved, pushing Microsoft's stock price close to historical highs. The tech giant will release its new quarterly financial report after the market closes on July 30, Eastern Time. Given Microsoft's leading position in the generative AI field, which is expected to support its sustained mid-to-high single-digit total return rate, the firm calculates its risk-return ratio to still be attractive based on approximately 29 times the Generally Accepted Accounting Principles (GAAP) earnings per share for fiscal year 2027.

15%-20% Total Return Rate Expected to Continue

Morgan Stanley stated that Microsoft is likely to gain returns from its extensive generative AI investments and solution portfolio, which will support its stock price increase and future sustained growth. Coupled with Microsoft's strong capability in managing operating expenses, the firm is more confident that Microsoft can achieve a sustained mid-to-high single-digit (15%-20%) total return rate in the coming years.

OpenAI's losses will impact earnings per share in fiscal year 2026, but the firm predicts that Microsoft will reach a loss cap of $13 billion in the fourth quarter of fiscal year 2026, which will significantly accelerate the earnings per share growth rate for fiscal year 2027, exceeding 20%.

Strong Performance in the Previous Quarter Expected to Continue

In the third quarter of fiscal year 2025, Microsoft's various business segments outperformed market consensus expectations, and the company did not find any demand affected by macroeconomic factors. Azure achieved a 35% growth rate at fixed exchange rates, far exceeding the expected 31%, with a quarter-on-quarter growth rate increase of 4 percentage points.

The firm stated that although Azure's AI business performed robustly, contributing 16 percentage points to Azure's growth this quarter compared to a 13 percentage point contribution in the previous quarter, the core Azure business also exceeded the firm's expectations. Strong revenue growth, gross margins still above expectations, and effective control of operating expenses drove a year-on-year increase of 110 basis points in operating profit margin, resulting in earnings per share exceeding expectations by 7%.

Morgan Stanley indicated that Microsoft's revenue guidance for the fourth quarter exceeded market consensus, with Azure expected to maintain a year-on-year growth rate of 34%-35% (at fixed exchange rates), while earnings per share are within the market consensus range. The fourth quarter's Azure growth rate at fixed exchange rates is approximately 36%, and the guidance for a year-on-year growth rate of 34%-35% in the first quarter of fiscal year 2026 is likely to keep this key revenue growth driver in good shape and lay a solid foundation for Microsoft to achieve double-digit revenue growth in fiscal year 2026; the potential for low to mid-single-digit growth in operating expenses in the fourth quarter and fiscal year 2026 will offset gross margin pressure and help achieve double-digit operating profit growth in fiscal year 2026 Azure Cloud Services: High Growth Rate Expected to Continue

As Microsoft's core growth engine, Azure is expected to achieve a year-on-year growth of 35%-36% in the fourth quarter of 2025, calculated at constant exchange rates, with a growth guidance of 34%-35% for the first quarter of fiscal year 2026, in line with market expectations. Its growth momentum comes from three aspects: first, positive feedback from channel partners, accelerating cloud migration and Azure AI penetration; second, increased production of AI server racks and enhanced AI computing power, with shipments of the GB200 NVL72 racks rising from 1,000 units in the first quarter of 2025 to 6,000 units in the second quarter, alleviating computing power constraints; third, strong enterprise demand, with Chief Information Officers (CIOs) maintaining stable spending intentions on Azure. 52% of CIOs are deploying application workloads on Azure, and this will remain industry-leading over the next three years.

M365 Commercial Cloud: AI Tools Become New Growth Variable

Driven by average revenue per user, Microsoft's 365 commercial cloud is expected to achieve approximately 15% year-on-year growth in the fourth quarter of fiscal year 2025 (calculated at constant exchange rates), consistent with guidance. Previously, due to market caution regarding Copilot and known slowdowns in seat growth for Microsoft 365 due to increased penetration rates, market expectations were relatively low. Microsoft 365 Copilot is the most popular solution in Microsoft's expanding generative artificial intelligence product portfolio, consistent with observations from previous quarters.

Although investors have low short-term expectations for Copilot, the tool remains a focus: 72% of CIOs plan to use M365 Copilot in the next 12 months, expected to cover 31% of employees; the coverage ratio is expected to increase to 43% within three years, while the expected ratio for the fourth quarter of 2024 is projected to gradually rise from 17% to 38%. Current expectations somewhat compensate for previous shortcomings, but continuous verification of its return on investment (ROI) is needed to support growth.

Security Business: Defensive Advantages Stand Out

The security business is another growth highlight for Microsoft, with corporate security spending expected to grow by 9.8% in 2025, significantly higher than the overall software spending growth of 3.6%, making it the most defensive area of IT spending. Its advantages include: enterprises tend to integrate security tools (averaging over 50 tools used), and Microsoft has become the preferred choice for integration with its full-stack security products (such as EntraID and Purview); upgraded compliance demands drive bundled products; Security Copilot enhances automation capabilities through data advantages, further driving demand.

The security spending environment remains stable and strong, benefiting from three long-term security drivers: 1) Expanded attack surface—cloud and generative artificial intelligence (GenAI) development has introduced more potential attack points; 2) Intensified threat environment—malicious attackers are also using generative artificial intelligence; 3) Expanding regulatory/compliance requirements—especially concerning data security and governance related to generative artificial intelligence