There’s a moment in every great comeback story where someone finally says, “I told you so.”

Morgan Stanley (MS) isn’t quite there yet with Microsoft, but it’s getting close. MS is heading into Microsoft’s (MSFT) third-quarter fiscal 2026 (Q326) earnings on April 29, 2026, with an overweight rating and a freshly reaffirmed $650 price target, from the current $432.92.

The reason behind the huge shift? Morgan Stanley argues that the market is still sleeping on one of the most durable AI growth stories in enterprise tech.

The sentiment on the Street has been cautious, with capacity constraints, questions about Copilot’s competitive positioning against standalone AI labs, and uncertainty about whether all that capital expenditure is actually converting into returns. Morgan Stanley thinks that the narrative is about to shift.

“Our work suggests a shift in Copilot capabilities and adoption, leaving us positive on Microsoft’s platform opportunity,” the firm said in its preview note. “Leading GenAI position remains underpriced at 20x CY27 EPS, framing an attractive risk/reward.”

That’s a pointed statement from one of Wall Street‘s most influential tech analysts. And it sets up Microsoft’s upcoming earnings print as a potential turning point for how investors think about the stock.

Morgan Stanley’s $650 Microsoft target hinges on Azure growth 

The centerpiece of Morgan Stanley’s bull case isn’t Copilot, and it isn’t margins. It’s Azure, and specifically, whether Microsoft can deliver the one-point beat above guidance that the bank says is both achievable and necessary.

“This quarter, the Microsoft Cloud surpassed $50 billion in revenue for the first time, up 26% year-over-year, reflecting the strength of our platform and accelerating demand,” Microsoft CEO Satya Nadellasaid in the previous earnings call.

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Microsoft guided for Azure constant-currency growth of 37% to 38% in the third quarter of fiscal 2026. Morgan Stanley is confident in high-30s growth, citing strong channel checks, improving GPU capacity, and positive data from its Chief Information Officer survey.

The magic number investors are watching, according to the bank, is 39% constant-currency growth, one point above the high end of guidance.

That matters because Azure growth right now is governed by supply, not demand. The pipeline is full. The bottleneck is compute capacity. Specifically, the availability of AI server infrastructure is needed to fulfill what is already a committed backlog. 

Microsoft’s own management acknowledged the dynamic 

On the Q226 earnings call, Microsoft’s CFO noted that the mix of short-lived assets, primarily GPUs and CPUs, would remain at roughly two-thirds of total capital expenditure as the company works to close the gap between demand and supply.

“Next, we expect capital expenditures to decrease on a sequential basis due to the normal variability from cloud infrastructure buildouts and the timing of delivery of finance leases. As we work to close the gap between demand and supply, we expect the mix of short-lived assets to remain similar to Q2,” said Microsoft CFO Amy Hood.

The forward indicators already in hand are striking. According to Morgan Stanley’s note, based on Microsoft’s most recent results:

  • Remaining performance obligations (RPO) grew 110% year over year to approximately $625 billion.
  • Current RPO (cRPO) grew 39% year-over-year (YoY) in constant currency.
  • Azure delivered 38% constant-currency growth, one point ahead of guidance.

In fact, those numbers frame a company with a demand problem most enterprises would envy.

In Q226 results, Microsoft Cloud surpassed $50 billion in revenue for the first time, up 26% year over year.

Bloomberg via Getty Images

Microsoft says Copilot narrative is just getting started

If Azure is the engine, Copilot is the story Wall Street hasn’t fully bought yet. Microsoft closed Q226 with 15 million paid Microsoft 365 Copilot seats, according to MSFT’s earnings call. That was a new key performance indicator the company introduced last quarter. 

Morgan Stanley is watching closely for signs that usage is accelerating and that adoption is spreading across Microsoft’s broader installed enterprise base. The framing matters here. Morgan Stanley describes Copilot as increasingly being viewed by enterprise customers as a “coworker,” a unifying layer across workflows rather than a discrete AI feature. 

Related: Bank of America resets Microsoft stock forecast ahead of earnings

That repositioning, if it holds, changes the revenue conversation from seat count to workflow penetration. It also directly answers the competitive threat from standalone AI labs that has weighed on sentiment.

CIO survey data from Morgan Stanley’s April 2026 report, according to Investing.com, reinforces the constructive view. Chief information officers surveyed expect software spending growth to accelerate to 4.1% in 2026, up 32 basis points from the fourth-quarter 2025 reading, according to Morgan Stanley.

Within that positive software backdrop, Microsoft was identified as the primary beneficiary of durable cloud transformation tailwinds and rising GenAI investment.

Microsoft’s capital expenditure is also rising fast

Not everyone on Wall Street is comfortable with the scale of Microsoft’s infrastructure spending. But Morgan Stanley is.

The firm raised its capex estimates, pointing to higher costs for memory and server components, but emphasizes that much of the spending is tied to near-term, revenue-generating assets like GPUs and CPUs, supported by a $625 billion RPO backlog. This means it’s backed by contracted demand rather than speculation. 

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Morgan Stanley expects operating expense discipline to help offset margin pressure, projecting high-teens operating income growth by fiscal 2026. 

On valuation, the bank argues Microsoft’s current multiple of around 20 times its 2027 EPS estimate of $20.92 doesn’t fully reflect its long-term growth potential, making the stock an attractive risk/reward opportunity in large-cap tech.

What Microsoft’s Q326 earnings results need to deliver

Morgan Stanley laid out the precise conditions it believes are necessary to move MSFT shares meaningfully higher after the print.

According to the firm’s preview note, investors will be watching for:

  • Azure constant-currency growth of at least 39% in fiscal third-quarter 2026, a one-point beat above the high end of guidance.
  • Fourth-quarter Azure guidance in the low-to-mid 30s in constant currency, reflecting a mid-single-digit deceleration from the third quarter due to a tougher year-over-year comparison.
  • Positive commentary on capacity supply and GPU allocation timelines.
  • Evidence of accelerating Copilot usage and adoption momentum beyond the 15 million paid seat baseline.
  • Capital expenditure guidance that signals continued investment without spooking investors on near-term margin impact.

A miss in any of these, and the cautious sentiment that has kept the stock range-bound could persist. Deliver on the combination, and Morgan Stanley believes the market will begin repricing Microsoft’s AI monetization story, one that the firm says has been undervalued for long enough.

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