微软4Q26预览：停滞还是突破？

Mark L. Moerdler, Ph.D.+1 917 344 8506mark.moerdler@bernsteinsg.com Firoz Valliji, CFA+1 917 344 8316firoz.valliji@bernsteinsg.com Shelly Tang, CFA+1 917 344 8342shelly.tang@bernsteinsg.com Price Target 646.00 USD MSFT Microsoft 4Q26 preview: Stagnation or breakout? This is not our traditional preview note. Rather than focusing on the specific numbers, weinstead discuss the core concerns that have negatively impacted the stock and what it willtake for those to abate and the stock to rebound. While we believe Microsoft will deliver asolid quarter the question is whether the results will cause the bear concerns to dissipate andthe stock to meaningfully rebound. Investors are concerned about the impact of AI on its business. Is Azure AI a good business?Will Microsoft SaaS be negatively impacted by AI? We are starting to get answers to thesequestions as 1) Azure growth and Copilot adoption increase; 2) as CAPEX excludingcomponent inflation grew slower than Azure revenue last quarter; and 3) AI gross marginshave stabilized and likely will improve. Increasing validation of the strength of the Microsoftbusiness, where Microsoft is recognized as an AI winner and not loser could take 1-2 morequarters or could even be this coming quarter. Thus, while we like the setup we are not callingthe quarter. With these valuation levels; the street expectations are quite muted for the quarter andanticipating a good but not break-out quarter investors have the opportunity to buy a qualitybusiness with little downside, and we believe a breakout coming within the next few quarters.While we are not sure if this quarter will be that quarter or if it takes a couple more quarterswe continue to believe that the business is solid and will be an AI winner, not just today but formany years to come. Investment Implications Microsoft:We like the setup for MSFT with expectations and valuation low and signs ofCAPEX slowing and Azure accelerating while Copilot adoption strong. Given the risk/rewardone should start to rebuild one's Microsoft position over the remainder of the year. VALUATION COMPS TABLE DETAILS Microsoft’s stock has been punished since the beginning of the year as investor concern has increased about Generative AI ingeneral and more specifically the potential impact of Gen AI on Microsoft’s business. Today’s note is not the traditional Microsoftpreview as we look at the controversies themselves that have negatively impacted Microsoft’s stock rather than focusing onthe numbers and the setup for the quarterly results. The reason is simple: while a blow-out quarter would meaningfully help thestock, the underlying issues are not tied to the numbers per se but rather concern about the quality and stability of the businesson a go-forward basis. More specifically, investors are concerned about the sustainability and the quality of growth; the value of all the CAPEXinvestments; and the potential impact on FCF and margins. Microsoft has delivered the strongest GAAP operating margins anddouble-digit growth better than most public enterprise software companies and investors don't want to see that change even asthe company is in a very important investment cycle. Please remember that Microsoft investors are concerned about a) the SaaSapocalypse (Global Software: Putting the SaaS Apocalypse in Context) especially within the Office franchise and b) an AI bubble(AI Blackbook) blowing up the value of all the CAPEX. Disproving negatives are extremely difficult especially when the negatives have no specific time horizon (Copilot growth wasstrong, but investors worry it will shrink at some point). Therefore, it may take a couple of solid quarters and improving Azuregrowth + CAPEX growing slower than Azure revenue and Copilot / Office 365 E7 strong growth to disprove the bear thesis. Butexpectations are muted, and the stock valuation is low so the risk/reward is very much on the upside opportunity if the companycan start to alleviate the concerns. In fact, Microsoft has numerous levers they can pull that could start to change the narrative, and we believe they are workingwith all of them (details later in the note). What to do with the quarter: •The large CAPEX, we believe, for the remainder of the CY, as well as Gross margin and FCF pressure are known and built intoexpectation which sets a fair to low bar for the company.•Microsoft has the potential to beat the street’s revenue growth expectation especially on Azure and possibly for Office.•Given the valuation the downside risk is low and the upside opportunity, especially over the remainder of the year is quitestrong.•So, heading into the earnings - we see the worst case is valuation stagnation or a moderate break out as the near-termoutcome rather than meaningful downside risk. But there is upside as Microsoft has numerous levers (discussed below) thatcould change the narrative and whether they are able to drive all those levers this quarter or it takes a couple of quarters t