Morgan Stanley says Microsoft (MSFT.US) shares have rebounded recently, meaning the tech giant now faces a "higher bar" if it wants to sustain its upward momentum.
The bank has an "Overweight" rating on Microsoft and a price target of $600. That target implies nearly 12% upside from Monday's closing price of $533.52. Morgan Stanley believes Microsoft needs to prove that Azure growth can be sustained in the mid-40% range, while also driving further commercialization of Microsoft 365 and Copilot and maintaining "disciplined" operating expense control in order to extend this growth momentum into fiscal 2027.
Morgan Stanley analyst Adam Wood further noted that demand for Azure remains "strong" across both core cloud services and artificial intelligence (AI) workloads. The bank's recent chief information officer (CIO) survey shows that, as workloads migrate to the cloud, Microsoft remains the biggest beneficiary of growing IT budget share, ahead of Amazon (AMZN.US) and others.
The analyst wrote: "Importantly, we believe improved data center capacity availability will provide an additional boost to Azure growth. Based on our latest capacity tracking data, Microsoft brought roughly 3.25GW of new capacity online in fiscal 2026, and we expect another roughly 4.25GW to come into service in fiscal 2027. As this capacity ramps and efficiency gains continue across the entire capacity system, we believe higher capacity availability will be another key lever driving Azure growth."
For Microsoft 365, recent partner surveys show that the E3-to-E5 upgrade trend remains strong, largely driven by security needs, while early E7 adoption is another potential upside driver. The analyst added that, at the same time, Copilot adoption is also improving.
In a note to clients, the analyst wrote: "Following better-than-expected results last quarter and preliminary fiscal 2027 guidance pointing to durable growth momentum in the company's core growth businesses, the market narrative around Microsoft has materially improved."
The analyst added: "As the market narrative and fundamentals have continued to improve, Microsoft's valuation has also risen over the past few months, which means expectations have increased heading into the fiscal first quarter 2027 (F1Q27) earnings release. However, Microsoft's current share price corresponds to about 27 times forward 12-month (NTM) GAAP earnings per share, still below Microsoft's historical average of about 28 to 29 times. On a growth-adjusted basis, the discount is even more pronounced — Microsoft's current NTM price-to-earnings-to-growth (P/E/G) ratio is about 1.25 times, versus a historical level of about 1.9 to 2.2 times. Given that the market expects Microsoft's earnings growth to exceed 20% after fiscal 2027, we still view its risk-reward as attractive, though we acknowledge that the higher valuation and improved market narrative mean the bar for further share price gains ahead of the F1Q results is also higher."
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