Results beat; long-term structural growth story remains unchanged

Results beat; long-term structural growth storyremains unchanged Target PriceUS$614.60(Previous TPUS$636.30)Up/Downside27.6%Current PriceUS$481.63 Microsoft reported (29JanHKT)2QFY26 (June year-end) results: revenue wasUS$81.3bn, up16.7% YoY (1QFY26: +18.4% YoY),1.5%/1.2% better than bothour forecast/Bloomberg consensus estimates, driven bybetter-than-expectedrevenuegeneration in Productivity and Business Processes(PBP)andIntelligentCloud(IC)segment.Operating income was up 20.9%YoY toUS$38.3bn, 3.8%/4.8% ahead of our forecast/consensus, also driven by thebeat in PBP and IC segments.Azure and other cloud services revenue growthof 38% onaconstant currency basis was inline with consensus, while thecapexincluding financial leases of US$37.5bn was 3% higher. We maintain our FY26-28E OP forecast largely unchanged, while lower our DCF-based target price by3% to US$614.6 (was US$636.3) on the increase ofcapexforecast, translatinginto 35x/31x FY26E/27E PE.We reiterate our BUY rating as we believeMicrosoft’s long-term structural growth story remains unchanged, and we seesupport from the robust growingcommercialRPObalance(110% YoY; or28%YoY if excluding OpenAI contribution)and expanding ARPU in PBP. China Internet Saiyi HE, CFA(852) 3916 1739hesaiyi@cmbi.com.hk Ye TAO, CFA(852) 3850 5226franktao@cmbi.com.hk Wentao LU, CFAluwentao@cmbi.com.hk Cloud revenue growth remains solid.Intelligent Cloud (IC)segmentrecorded revenue growth of28.8% YoY in2QFY26to US$32.9bn(40.5%of total revenue),andAzure and other cloud serviceswithin thesegmentsawrevenue growth of 39% YoY (1QFY26:40%),ahead of previousguidance of 37%, and management guided for 37-38% YoY growth in3QFY26.Capex(incl. finance leases)came in at US$37.5bn for 2QFY26(consensus: US$36.3bn), up66% YoY, among which roughly2/3of thespendingwas on short-lived assets (such as GPUs and CPUs) tofulfildemand.Management stressed that supply constraintsstillpersist, andtheyhaveprioritized GPU allocations and capacity for first-party apps overAzure.Management stated thatAzure’srevenuegrowth expectations wouldexceed 40% if all GPUs newly commissioned in 1HFY26 were allocated toAzure.On outlook, managementexpects capital expendituresin 3QFY26todecrease onasequential basis due to the normal variability from cloudinfrastructure buildouts and the timing of delivery of finance leases.ARPU expansion trendcontinuedin PBP business.Productivity and Source: FactSet Business Processes (PBP)revenue was US$34.1bn in2Q, up15.9% YoY(2QFY25:13.9%;1QFY26:16.6%), and accounted for 42.0% of totalrevenue.M365 commercial/consumer cloud revenue increased by14%/27% YoYonaconstant currency basis(1QFY26:15.0/25.0%),aidedby6%/6% YoY growth in paid M365 commercial seats/subscribersandARPU expansion.Management highlighted that DAUs of Microsoft 365Copilot hasincreasedby 10 times YoY, and the number of paid Microsoft365 Copilot seats has reached 15mn in 2QFY26. Source: FactSet OPM expansionwas again better than consensus expectation.In2QFY26,overallGPMshrank0.7pptsYoY to 68.0%owingtocontinuedinvestment in AIinfrastructureand AI product usage.During the period,overall OPM came in at 47.1%, up 1.6ppts YoY and was better thanconsensus at45.5%, driven by 3.0ppts margin expansion in PBP aided byimproved operating leverage, although this was partly offset by0.3ppts YoYdecline in OPM of IC to 42.2% (consensus: 41.9%). Source: Company data,CMBIGMNote: cc: constant currency Source: Company data,CMBIGM Changes in forecast and valuation Risks 1.Slower-than-expected margin expansion;2.Slower-than-expected ramp-up in revenue contribution from AI related service. Disclosures& Disclaimers Analyst CertificationThe research analyst who is primary responsible for the content of this research report, in whole or in part, certifies thatwith respect to the securities or issuer that the analyst coveredin this report: (1) all of the views expressed accurately reflect his or her personal views about the subject securities or issuer; and (2)no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by that analyst in this report.Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to the date of issue of this report; (2) willdeal in or trade in the stock(s) covered in this research report 3 business days after the date of issue of this report; (3)serve as an officer of anyof the HongKong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies coveredin this report. CMBIGM RatingsBUY : Stock with potential return of over 15% over next 12 monthsHOLD:Stock with potential return of +15% to-10% over next 12 monthsSELL: Stock with potential loss of over 10% over next 12 monthsNOT