Tangible ROI increasingly evident

Tangible ROI increasingly evident Target PriceUS$634.20(Previous TPUS$616.40)Up/Downside40.6%Current PriceUS$451.10 Microsoft reported upbeat 4QFY26 (June year-end) results on 30 June BJT.Revenue rose 18% YoY to US$90.0bn (3QFY26: +18% YoY), 3% above bothour forecast and Visible Alpha (VA) consensus, driven by better-than-expectedrevenue across all three business segments. OP grew 18% YoY to US$40.6bn,4% ahead of our forecast and consensus, supported by beats in the Productivityand Business Processes (PBP) and Intelligent Cloud (IC) segments. In our view,the tangible ROI oncapexinvestment is becoming increasinglyevident in boththe cloud business and first-party apps, as evidenced by: 1) an acceleration inAzure and other cloud services revenue growth to 43% in 4QFY26 (vs guidanceof 39-40%), which mgmt. expects to accelerate further to 45% in 1QFY27; and2) 30mnpaid Microsoft 365 Copilot seats, with net seat adds more than doublingQoQ on improved product shape and more integrated AI offerings.Mgmt.keptits CY26capex investment expectation unchanged and guided for furtherefficiency gains across its CPU and GPU fleet to better address unfulfilleddemand,against a backdrop that demand continues to exceed availablecapacity.Mgmt.also guided for positiveFCFin FY27. Werollover valuation toFY27E andliftDCF-based TP by 3% to US$634.2, implying 32x FY27E PE.BUY. 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 Shuyin GUO(852) 3916 3716guoshuyin@cmbi.com.hk Azure revenue growth acceleration beat expectations.Azure and othercloud services within the IC segment delivered 43% YoY revenue growth(3QFY26: 40%). Mgmt. attributed the beat to: 1) efficiency gains across theCPU and GPU fleet; 2) processimprovements that enabled earlier deliveryof new capacity; and 3) stronger-than-expected GitHub Copilot consumptionfollowing the June business model change that aligned pricing with usageand value. Capex (including finance leases)rose 69% YoY toUS$41.0bn in4QFY26, of which roughly two-thirds was still spent on short-lived assets tofulfil demand,such as GPUs and CPUs. Reflecting changes in the estimateduseful lives ofdatacentersand office buildings, and a shift of more futuredatacenterleases from finance leases to operating leases,mgmt.updateditsCY26 capex guidance to US$175bn,while emphasizing that itsunderlyinginvestment expectations on a comparable basis remainunchanged.Mgmt.expectscapexof more than US$50bn in 1QFY27 andguided for positive FCF in FY27.We are estimating a FY27EcapexofUS$200bn,which is in line with consensus if including the leasereclassification impact. Rapid growth in Microsoft 365 Copilot paid seats.PBP revenue wasUS$37.8bn in 4QFY26, up 14% YoY(4QFY25: +15.7%; 3QFY26: +16.9%).Microsoft 365 commercial/consumer cloud revenue grew 14%/22% YoY ona constantcurrency basis (3QFY26: 15%/29%), aided by 6%/7% YoYgrowth in paid Microsoft 365 commercial seats/consumer subscribers andby ARPU expansion.Mgmt.highlighted that paid Microsoft 365 Copilotseats reached 30mn in 4QFY26 (3QFY26: 20mn), with net seat adds morethan doubling QoQ.Overall OPM expansion also betterthan expected.OPM came in at Source: FactSet 45.1% in 4QFY26, up 0.2ppts YoY and ahead of consensus at 44.6%, withPBP/IC OPM 0.3/1.8ppts better than consensus respectively. Post results,we lifted our FY27-28E revenue/OP forecasts by 3-5%/4-6% to reflectstronger-than-expected revenuegrowth across the business segments andbetter-than-expected operating efficiency gains.We now forecastrevenue/OP growth of 18.4%/17.6% YoY in FY27E.Trading at22.7x FY27EPE on our forecasts (vs a five-year average one-year-forward PE of 30x),Microsoftnowoffers attractive risk-reward, in our view. Source: Company data,CMBIGMNote: ccmeansconstant currency Source: Company data,CMBIGM Changes in forecast and valuation Source:Bloomberg,CMBIGM estimates 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 thisresearch report, in whole or in part, certifies that with respect to the securities or issuer that the analyst covered in 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 codeof 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 thedate of issue of this report; (2) willdeal in or trade in the stock(s)covered in this research report 3 busin