New Microsoft Price Target as $33 Billion Cloud Update Turns Heads

Microsoft (MSFT) delivered the kind of quarter investors have been waiting for from the AI buildout: accelerating cloud growth, guidance ahead of expectations and better than expected free cash flow that more than doubled what Wall Street had modeled.

Coming into the company’s earnings call, we shared that we knew we had some catch up work to do with our MSFT price target. That combined with what we saw and heard on Wednesday night is leading us to boost that target to $600 from $500. Others across Wall Street are taking their MSFT targets higher, in some cases meaningfully higher. Wells Fargo reset its target at $750, and Citi is now at $680, while Morgan Stanley landed at $650.

The key behind our price target and most likely those other ones is that Azure continues to deliver meaningful upside relative to market expectations despite capacity constraints. Azure revenue grew 48% to $33.2 billion versus the 44% Wall Street expected, and management guided for growth to pick up to 49% to 50% in the December quarter even with some third-party capacity slipping into 2027, because demand continues to exceed supply. Microsoft’s commercial backlog jumped 73% to $677 billion, equal to roughly 10.6 quarters of the $63.9 billion in Microsoft Cloud revenue it booked in the September quarter.

Similar to what we saw with Q3 2026 results for Google’s (GOOGL) cloud segment, the operating income at Microsoft’s operating income for Agents and Infra rose at a brisker pace compared to its revenue. But the big difference between the two is the $18.6 billion in free cash flow Microsoft delivered versus the roughly $8.5 billion Wall Street modeled, while still returning $10.2 billion to shareholders.

That said, like Meta (META), Google, and most likely as we’ll hear on Thursday from Amazon (AMZN), Microsoft expects to step up its capex spend in calendar 2027. This more than likely means Wall Street will need to revisit its free cash flow expectations for Microsoft when the company reports its current quarter in early January and lays out its calendar 2027 capex plans. Until we have greater clarity on that, and whether that free cash flow figure is a positive one or not and how its stacks up against Wall Street expectations, we are keeping our Two rating in play. Current consensus expectations have Microsoft delivering free cash flow near $30 billion in the current fiscal year that ends June 2027 and $35.6 billion for the one ending June 2028.

Even though we can see upside to $600 for MSFT shares, waiting the answer to that question could keep MSFT shares range bound. Should Microsoft tap its investments in OpenAI and Databricks following IPOs for those companies, that would lead us, and most likely others, to revisit capex spend and potential cash flow dynamics. It would also have a role to play in revisiting our new MSFT target price.

Before we move on to discuss Microsoft’s quarter, we’ll reiterate one of the comments we made regarding Google and eventual cash flow. When Microsoft’s AI buildout begins to temper and capex starts to decline, it stands to reason that Azure margins will lift and the company’s free cash flow reaccelerates. That’s the medium- to longer-term opportunity in the shares.

Microsoft’s September Quarter

For its fiscal first quarter of 2027, Microsoft’s revenue climbed 19% to $92.3 billion, ahead of the 17% growth and $90.6 billion analysts expected, and adjusted EPS of $4.89 topped the $4.71 consensus. What stands out to us is the operating leverage. Operating income rose 21% while operating expenses grew just 6%, and operating margin edged up to 50%.

CFO Amy Hood credited efficiency gains across the GPU and CPU fleet that let Microsoft sell more capacity without adding cost, and that’s where internal AI use shows up in the numbers: throughput for Copilot workloads rose more than 50% from the June quarter, and in-house AI models are taking on more work at lower cost.

Under the new segment structure, Agents and Infra revenue grew 25% to $76.8 billion, Microsoft Cloud revenue accelerated to 30% growth and Foundry revenue more than tripled. M365 commercial cloud grew 18% in constant currency on an adjusted basis, helped by GitHub Copilot, and management expects about 19% growth in the December quarter with acceleration through the fiscal year. The soft spot remains Devices and Consumer, where revenue fell 3% to $15.5 billion and Windows OEM and devices revenue is expected to fall in the mid-30% range in the December quarter on elevated PC inventory and a tough Windows 10 comparison. That Device and Consumer outlook should not be a surprise given the Q3 2026 drop in PC industry shipments.

On the customer AI side, Microsoft is seeing adoption broaden. Copilot daily users rose nearly 50% from the June quarter and more than five-times year over year, the number of customers with more than 50,000 Copilot seats rose more than eight times, and the number of customers consuming Copilot credits through usage-based billing grew more than 75%. That shift from per-seat subscriptions to consumption expands Microsoft’s addressable market, though Hood cautioned it will move more slowly outside of coding.

Those data points and others support the view that AI adoption is rising and usage expanding, and that reinforces our position on several holdings in the Portfolio that stand to benefit from the AI infrastructure build out as does the collective step up in AI and data center capex.

For the December quarter, Microsoft guided revenue to $96.0 billion to $97.1 billion, above the $95.6 billion consensus, with operating margin down slightly year over year as Azure becomes a bigger part of the mix and costs from its latest employee buyout offer flow through.

More on Capacity and the Capex Figure

Capital spending for the quarter came in at $45.2 billion, below Microsoft’s own $50 billion forecast, largely because third-party capacity deliveries slipped, not because Microsoft pulled back. Still, that likely means Microsoft would have still delivered positive free cash flow for the quarter, more likely in-line with what Wall Street had forecasted. The larger question is

It expects capex to top $50 billion in the December quarter, total about $170 billion for calendar 2026 and accelerate again in the first half of 2027 as those deliveries arrive and memory and storage costs climb. That along with Meta’s (META) step up in capex bodes well for Arista Networks (ANET) but as we’ve discussed capacity constraints could make for fits and starts for Arista’s deliverables.

Microsoft added 24 new data centers across five continents in the quarter, installed its first Nvidia (NVDA) Vera Rubin GPUs and cut the time it takes to bring new GB300 capacity online by about 20%.

More on Free Cash Flow Figure

Operating cash flow rose 29% to $58 billion, and capex consumed about 68% of it, compared with roughly 122% at Alphabet, which is why Microsoft generated $18.6 billion in free cash flow while Alphabet burned $9.1 billion. Granted, some of Microsoft’s upside is capex timing, and let’s remember it also leans on finance leases, $7.4 billion in the quarter, that don’t run through that cash figure.

Even so, management expects to remain free cash flow positive in fiscal 2027 and will tap leasing or debt markets only “when we believe it is attractive to do so.” As we called out above, come January we’ll have a better indication for that free cash flow figure and how it stacks up against Wall Street’s models.

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At the time of publication, TheStreet Pro was long AMZN, ANET, GOOGL, META, MSFT and NVDA.