Written by: Rita

Microsoft delivered a fully unexpected performance report for the fourth quarter. Azure cloud revenue grew by 43% year-on-year, surpassing the market expectation of 40%, and further accelerating from the previous quarter's 39%. The number of paid Copilot seats exceeded 30 million, with a net increase of 10 million in a single quarter, doubling the increase from the previous quarter. Citigroup Research pointed out in a report on July 30 that Microsoft strongly refuted the market's bearish view with this earnings report. Both revenue and profit exceeded expectations, with both core businesses accelerating simultaneously, and the logic of AI monetization is being realized. Citigroup raised its target price from $570 to $600, maintaining a buy rating.

Azure growth continues to accelerate, next quarter guidance exceeds expectations

Fourth quarter intelligent cloud revenue was $39.3 billion, a year-on-year increase of 31%, exceeding Citigroup's expectation by 2.6%. Azure's growth rate of 43% is a notable acceleration from the previous quarter's 39%. Citigroup attributed this performance to a comprehensive improvement in operational efficiency, including higher token throughput leading to capacity realization and GitHub usage billing exceeding expectations.

Management's guidance for the next quarter was even more surprising to the market. Azure's first quarter growth rate is expected to be around 45%, continuing to accelerate from the fourth quarter's 43%, and growth in the first half is expected to be higher than that in the second half. Citigroup raised its Azure growth forecast for fiscal year 2027 (FY27) by about 3 percentage points to 45.5%. The capacity allocation strategy has not changed, with acceleration mainly coming from improved deployment efficiency and fleet utilization.

Citigroup believes the re-acceleration of Azure is structural. Although capacity bottlenecks will continue until 2026, efficiency improvements are alleviating supply constraints. With capacity increasing, Copilot can expand its reach.

Copilot surpasses 30 million seats, M365 Business Cloud growth accelerates

Productivity and business process revenue reached $37.8 billion, a year-on-year increase of 14%, slightly exceeding Citigroup's expectations. M365 (Microsoft 365) Business Cloud revenue increased by 14%, with Copilot paid seats reaching 30 million, surpassing Citigroup's expectation of 28 million. The net increase in a single quarter of 10 million is double that of the previous quarter. This is primarily due to strong sales execution at the end of the fiscal year, as well as discounts for large customers deploying Copilot stimulating wider adoption.

M365 Business Cloud growth is expected to be close to 15% next quarter. Excluding the 2% baseline drag from last year's revenue recognition adjustments, the actual growth rate is about 16%. E5 and Copilot are the core drivers of ARPU growth, while E7 and Copilot Cowork are still in the early adoption phase.

Citigroup raised its productivity and business process revenue forecast for fiscal years 2027 to 2028 (FY28), primarily reflecting accelerated Copilot adoption and a rebound in M365 Business Cloud growth. More personal computing business revenue reached $12.9 billion, a year-on-year decline of 5%, but it exceeded Citigroup's expectations by 7%, with search business partially offsetting weakness in Windows OEM and Xbox.

As Copilot sells well, there is a demand for Azure's computing power. The larger the AI workload, the greater the consumption of Azure's computing resources, creating a positive cycle between the two.

Profitability and valuation improving simultaneously, $600 target price implies 54% upside potential

Fourth quarter adjusted earnings per share (EPS) was $4.81, significantly higher than the market consensus expectation of $4.21. The gross margin of 67.2%, although down 1 percentage point year-on-year, exceeded Citigroup's expectations by 82 basis points. The total operating profit margin was 45.1%, basically flat year-on-year, and exceeded Citigroup's expectations by 62 basis points. The operating profit margin for intelligent cloud improved sequentially to over 40%, and the scale effect of the cloud computing business is accelerating.

In terms of capital expenditures, cash capital expenditures were $35.8 billion, higher than Citigroup's expected $31.5 billion. Total capital expenditures, including finance leases, were $41 billion, slightly below expectations. Citigroup lowered its total capital expenditures forecast for fiscal year 2027 by about 9% to $237 billion, primarily reflecting the impact of accounting standards changes, while the actual investment intensity remains unchanged.

Citigroup raised its target price from $570 to $600, corresponding to about 26 times the fiscal year 2028 earnings per share. The current share price is $390, implying about 54% upside potential. Citigroup believes this valuation is reasonable, as Microsoft’s growth is re-accelerating and its leadership position in the AI field has not been fully priced.

The signals conveyed by Microsoft's earnings report are very clear: the re-acceleration of Azure and the expansion of Copilot are occurring simultaneously, with both being causally related. The market previously only saw the cost side of capital expenditures, and now it is beginning to see revenue realization. Citigroup's $600 target price is based on the assumption of about $24 earnings per share for fiscal year 2028. The contribution from AI business is expanding, and operational efficiency is improving. This is the underlying logic behind Citigroup's $600 price target.

Disclaimer

This article is a整理与解读 by潮向研究 of third-party brokerage research reports (Citigroup Research, July 30, 2026), combined with整理 of publicly available market information. The ratings, target prices, earnings forecasts, and related judgments quoted in the text are the opinions of the brokerage's analysts and only represent the position of their respective institutions, not representing the views of潮向研究, nor constituting any investment advice.

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