Microsoft sends Wall Avenue a $625 billion message

Wall Avenue is just not upset as a result of Microsoft (MSFT) staggered throughout earnings season.

As a substitute, Wall Avenue is disenchanted that Microsoft didn’t carry out as strongly because the market anticipated, notably on the subject of Azure upside in a market that has gone loopy for AI.

That response, in accordance with Morgan Stanley, misses the purpose.

“Sure, Azure missed Avenue expectations by one level, however at 21x CY27 EPS, the valuation seems to overlook the larger image,” analysts wrote in a notice.

On almost each metric, Microsoft’s fiscal second-quarter outcomes delivered on a number of accounts:

• Income elevated 17% yr over yr.

• Working margins expanded roughly 160 foundation factors to 47%.

• Earnings per share are up 21% on a constant-currency foundation.

• Outcomes excluded round $10 billion of OpenAI-related achieve.

Azure, nevertheless, grew 38% yr over yr in fixed foreign money, beating Microsoft’s personal steerage by some extent, but it surely fell in need of the 40%-plus development many traders baked into the outcomes.

In the long run, that one metric ended up looming massive over the whole lot else.

Morgan Stanley believes traders are specializing in the flawed goal.

Microsoft’s residual efficiency obligations, or contractual future revenue, jumped 110% from the earlier yr to $625 billion.

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Even with out the OpenAI-related contracts, RPO is up 28%, translating into broad-based business demand.

Right here’s why it’ll matter to the typical investor.

• Business clients is about 77% of Microsoft’s income.

• Bookings often come earlier than income, not after it.

• Backlog sturdiness backs forthcoming development visibility.

What meaning is that even when Azure optics look messy, the pipeline is getting higher and higher.

Microsoft executives had been open in regards to the components hindering Azure’s development.

CFO Amy Hood stated buyer demand is way outstripping provide, particularly on the subject of superior AI GPUs, Enterprise Insider stories.

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She additionally stated that if Microsoft had given all of its extra GPU capability to Azure, the acknowledged rise would have been greater than 40%.

Microsoft is as a substitute purposefully placing restricted sources towards:

Now, that does strain near-term Azure development metrics. Nevertheless, for Microsoft, it strengthens Microsoft’s long-term AI distribution and monetization technique.

Morgan Stanley is advising market watchers to see this as strategic self-discipline, not execution danger.

Microsoft stated it now has 15 million paying Microsoft 365 Copilot seats, whereas it has greater than 450 million enterprise customers.

The hole is why Wall Avenue is so impatient. It additionally outlines the potential upside.

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Three key indicators of adoption have emerged.

• Every day lively customers are up 10x yr over yr.

• 80% of CIOs count on to make use of Copilot throughout the subsequent 12 months, per Morgan Stanley surveys.

• ARPU enlargement is turning into the first development lever as seat development slows.

To place it merely, monetization remains to be in its early levels, however the utilization curve goes within the appropriate course.

At roughly 21x Morgan Stanley’s 2027 earnings estimate, the agency argues Microsoft’s valuation fails to mirror a number of components.

• Lengthy-lasting development on the high

• Income visibility based mostly on backlog

• The chance for long-term margin development

Morgan Stanley maintained its obese ranking and $650 value goal, saying that after traders notice Azure’s issues are with provide and never demand, their emotions will change.

The principle takeaways are clear.

• This quarter, Microsoft did not allow us to down.

• Wall Avenue merely hasn’t made up its thoughts about how lengthy it could actually wait.

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This story was initially revealed by TheStreet on Feb 1, 2026, the place it first appeared within the Investing part. Add TheStreet as a Most popular Supply by clicking right here.