Morgan Stanley says Microsoft's Azure growth acceleration and Copilot monetization are being overlooked, with the stock trading at an implied 16 times earnings despite forecast profit growth above 20%.
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Microsoft could gain 50% as Morgan Stanley flags 16x P/E mispricing
Morgan Stanley says Microsoft's Azure growth acceleration and Copilot monetization are being overlooked, with the stock trading at an implied 16 times earnings despite forecast profit growth above 20%.
Microsoft's cloud and AI software businesses are approaching an inflection point that the market has yet to price in, Morgan Stanley analysts wrote, arguing the stock's roughly 16 times forward earnings multiple undervalues a company with profit growth exceeding 20%.
"We think the market has become too negative," Adam Wood, analyst at Morgan Stanley, said in a July 21 note. The firm maintained its overweight rating and a $600 price target, implying about 50% upside from current levels.
Microsoft shares have fallen about 18% year to date to around $399, making it the worst-performing Magnificent 7 stock in 2026. The broader S&P 500 software index has dropped more than 25% from its October highs as investors trimmed holdings amid AI disruption fears. Morgan Stanley sees this as overdone, forecasting Azure revenue of $214.9 billion in fiscal 2028 and $305.9 billion by fiscal 2029 — 5% and 7.8% above consensus, respectively.
The valuation gap matters because Microsoft's commercial remaining performance obligations have swelled to $627 billion, nearly doubling year over year, giving the company the deepest forward revenue visibility in software. If the market re-rates Microsoft to a more appropriate multiple, the implied upside could unlock significant shareholder value ahead of the July 29 earnings report.
Azure's growth has been constrained by supply rather than demand. Microsoft Chief Financial Officer Amy Hood disclosed on the fiscal second-quarter earnings call that if all newly deployed graphics processing units had been allocated to Azure, the segment would have grown above 40% rather than the reported 38%. With new capacity coming online, Morgan Stanley expects that constraint to ease, driving sustained acceleration through the second half of fiscal 2026.
The Copilot opportunity is undergoing a structural shift that Morgan Stanley described as one of the most significant average revenue per user expansion events in Microsoft's history. The commercial model is evolving from a simple per-seat subscription into a three-engine growth driver: direct M365 Copilot seat expansion, migration to the higher-value E7 bundle, and consumption-based billing for AI agents and workflow automation. The new E7 SKU bundles E5 security features, Copilot, and Agent365 into a single offering, mirroring the upgrade cycle from E3 to E5 that drove years of enterprise revenue growth.
Morgan Stanley's latest chief information officer survey showed 88% of respondents plan to deploy M365 Copilot within the next 12 months, up from 80% in the fourth quarter of 2025 and 72% a year earlier. Currently, 47% of enterprises use E5 licenses and 7% use E7; those figures are expected to rise to 50% and 21%, respectively, within a year. The analysts raised their Copilot revenue forecast to about $44 billion for fiscal 2026 and roughly $225 billion by fiscal 2029.
Azure Supply and Copilot Expansion Drive the Bull Case
Margin pressure remains the most common bear argument against Microsoft, but Morgan Stanley sees it as manageable. The firm lowered its gross margin forecasts for fiscal 2027 through 2029 to 65.7%, 64.4%, and 63.4%, respectively, citing higher AI-related depreciation and infrastructure costs. However, operating expense controls are expected to offset the drag, with operating margins forecast to expand modestly from 46.5% in fiscal 2027 to 47.2% by fiscal 2029. Hood has said the AI business is generating better margins than the cloud transition did at a comparable stage.
The Investment Case
Microsoft trades at roughly 23 times trailing earnings, cheaper than Alphabet at 28 times and Amazon at 35 times, making it the most affordable hyperscaler by that measure. Of the 57 analysts covering the stock, 54 rate it a Buy, according to data compiled by Koyfin. The consensus price target of about $550 sits below Morgan Stanley's $600 target, suggesting room for further upgrades if Azure and Copilot revenue materialize as forecast. The July 29 earnings report will provide the next catalyst for the stock.
This article is for informational purposes only and does not constitute investment advice.
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