Morgan Stanley released a report on Thursday stating that Microsoft (NASDAQ: MSFT) has a "clear" leadership position in the field of generative artificial intelligence (GenAI), citing "strong demand trends" for Microsoft 365, Copilot, and the Azure cloud business as evidence.
Analyst Josh Baer noted in a report to clients that, based on a second-quarter survey of Chief Information Officers (CIOs), Microsoft has "successfully maintained its leading position in core spending intentions, particularly in capturing GenAI spending share."
Regarding Azure, 62% of CIOs expect to increase related spending over the next 12 months, up from 57% in the Q2 2025 survey. Spending intentions for Microsoft 365 and Office 365 also showed a "significant increase," with 65% of CIOs expecting to boost expenditure, compared to 46% in Q2 2024 and 55% in Q2 2025.
Over the longer term, product tiers such as E1, E3, E5, and E7 continue to be favorable for Microsoft. Fifty percent of CIOs anticipate using the E5 tier next year, while 21% indicated they would adopt the higher-priced E7 tier.
Conversely, spending on on-premises server products is projected to decline by 0.8% over the next three years, whereas a Q4 2025 survey had shown a 0.9% increase.
Furthermore, CIOs expect Microsoft (relative to other vendors) to have the highest year-ahead spending growth rate at 7.6%, up from the 7.3% recorded in the Q4 2025 survey. The survey also revealed that 72% of CIOs expect to increase net spending on Microsoft tools, higher than the 67% from the Q4 2025 survey.
Baer added, "Moreover, Microsoft remains the primary vendor for capturing incremental GenAI spending share in 2026 and the next three years. We believe the sustainability of Azure's growth, the improving momentum of M365 Commercial Cloud (and Copilot), and earnings per share growth are undervalued by the market at the current valuation of 16 times the GAAP P/E for fiscal year 2028."
Baer assigned an "Overweight" rating to Microsoft with a price target of $650. Microsoft is scheduled to release its fiscal year 2026 fourth-quarter financial results after the U.S. market closes on July 29.
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