Microsoft's preliminary 4Q FY26 results beat expectations, with Azure and Copilot remaining the key highlights

Overview

This report provides Goldman Sachs' preliminary takeaways on MICROSOFT CORP's 4Q FY26 results. The report believes that the 3% after-hours share-price indication primarily reflects positive factors including strong Azure growth, accelerating Commercial Cloud growth, and paid Copilot seats surpassing 30 million, although these positives were partly offset by the pending release of 1Q FY26 Azure guidance and uneven Commercial bookings and RPO growth.

Core views

The core view is positive: in a supply-constrained environment, Microsoft is sustaining strong Azure growth through dynamic allocation of Azure demand, computing capacity for first-party applications such as Copilot, and internal Microsoft AI research and development. M365 Commercial Cloud growth accelerated on a comparable basis, while Copilot seat growth indicates that enterprise AI adoption is continuing. Goldman Sachs therefore maintains its Buy rating and $610 target price, but believes the market will next focus on whether capacity expansion can translate into Azure and M365 growth and whether high capital expenditures can generate sufficient returns.

Analysis framework

The report compares actual results with company guidance, Street expectations, and the prior quarter's performance. It focuses on metrics including revenue, Azure, PBP, IC, MPC, M365 cloud businesses, Copilot seats, capital expenditures, EPS, Commercial bookings, and RPO, while using questions to be validated on the earnings call as a framework for subsequent judgment. The valuation section derives the 12-month target price by applying a 28x P/E multiple to SNTM adjusted net income.

Methodology notes

• Valuation methodsP/E multiple valuation

  28x P/E and SNTM adjusted net income

  Goldman Sachs maintains its $610 target price based on applying a 28x P/E multiple to Microsoft's SNTM adjusted net income.

• Factor AnalysisGS Factor Profile

  Growth, Financial Returns, Multiple, Integrated

  GS Factor Profile compares a stock with the broader market and industry peers across growth, financial returns, valuation multiples, and integrated factors. The Integrated factor is the average of Growth, Financial Returns, and 100% minus the Multiple percentile.

• Event and Strategic AssessmentM&A Rank

  Probability ranking of acquisition targets

  Goldman Sachs uses an M&A rank from 1 to 3 to assess the probability that a company will become an acquisition target. This report primarily discloses the methodology and does not use Microsoft's specific M&A rank as a core investment conclusion.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• MICROSOFT CORP (MSFT.US)

  Core covered security

  Strengths

  Azure growth significantly exceeded expectations, Commercial Cloud growth accelerated, paid Copilot seats surpassed 30 million, and adjusted EPS was materially above Street expectations.

  Weaknesses

  Commercial bookings and RPO growth were uneven, 1Q FY26 Azure guidance remains pending, and high capital expenditures raise the bar for ROI.

  Comparison

  The rating is relative to the software infrastructure peer universe covered by Goldman Sachs; the report discloses coverage of companies including Adobe, Oracle, Salesforce, ServiceNow, and Snowflake.

  Risks

  Slower-than-expected internal silicon ramp-up, higher-than-expected investment in non-Azure projects, key leadership changes, and customers shifting more substantially toward custom software and affecting the applications business.

• Azure

  Key business underpinning Microsoft's growth and AI infrastructure narrative

  Strengths

  4Q FY26 constant-currency growth was 43%, exceeding guidance and market expectations and accelerating from the prior quarter.

  Weaknesses

  Growth is affected by supply constraints and dynamic computing-capacity allocation; the growth trajectory over the next four quarters remains subject to confirmation on the earnings call.

  Comparison

  The report primarily compares results with company guidance, Street expectations, and the 3Q FY26 growth rate rather than making direct quantitative comparisons with cloud peers.

  Risks

  The timing of converting new capacity into revenue is uncertain, and computing-capacity allocation among third-party customer demand, first-party applications, and internal AI research may affect the realization of growth.

• M365 Copilot

  Important indicator of enterprise AI adoption and application-layer monetization

  Strengths

  Paid seats exceeded 30 million, increasing by 10 million from 3Q FY26 and indicating continued expansion of enterprise customer adoption.

  Weaknesses

  Customers are sensitive to LLM costs, and the value proposition of Copilot relative to directly using AI laboratory tools requires further validation.

  Comparison

  The report focuses on customer choice between Copilot and direct enterprise adoption of AI lab tools.

  Risks

  If customers are dissatisfied with ROI, metering, pricing, or value capture, the pace of Copilot/E7 adoption could be affected.

Key data

• 4Q FY26 total revenue growth18% / 17% in constant currencyAbove guidance of 15% / 14% in constant currency and Street's approximately 15% expectation.
• Azure growth43% / 43% in constant currencyAbove the 39.5% constant-currency guidance and Street's 40% constant-currency expectation, accelerating from 39% in 3Q FY26.
• PBP growth14% / 14% in constant currencyAbove guidance of 12% / 11% in constant currency and Street's 13% expectation.
• Intelligent Cloud growth32% / 31% in constant currencyAbove guidance of 28% / 28% in constant currency and Street's 28% expectation.
• More Personal Computing growth-4% / -5% in constant currencyBetter than guidance of -11% / -12% in constant currency and Street's -9% expectation.
• M365 Commercial Cloud growth16% in constant currencyAfter adjusting for the prior-year revenue-recognition impact, accelerated from 15% in constant currency in 3Q FY26; the report uses a 14% constant-currency measure.
• M365 Consumer Cloud growth22% in constant currencyDecelerated from 29% in 3Q FY26, primarily due to a higher comparable base.
• Capital expenditures$41 billionIncluding finance leases, up 70% year over year and below Street's 75% expectation.
• Adjusted EPS$4.7411% above Street's $4.26 expectation.
• Commercial bookings11% growth in constant currency, 18% growth on an adjusted basisCompared with -6% growth in constant currency and 7% growth on an adjusted basis in 3Q FY26.
• Commercial RPO84% growth, 25% growth on an adjusted basisCompared with 99% growth and 26% growth on an adjusted basis in 3Q FY26.
• Paid M365 Copilot seatsMore than 30 millionAbove 20 million in 3Q FY26, representing a net increase of 10 million.
• Rating and target priceBuy; $61012-month target price based on applying a 28x P/E multiple to SNTM adjusted net income.

Impact & implications

The report suggests that market attention regarding Microsoft's AI and cloud businesses is shifting from quarterly beats toward the sustainability of capacity, computing-resource allocation, and returns on capital expenditures. Azure growth and Copilot adoption reinforce Microsoft's leading position in the enterprise AI and cloud infrastructure narrative, but the Fairwater capacity ramp over the next several quarters, allocation of resources between third-party Azure demand and first-party Copilot/internal AI research, and progress on custom silicon Maia 300 will determine the path to growth realization and the scope for margin expansion.

Risks

• A longer internal silicon ramp-up could limit market-share gains or gross-margin expansion.
• Investment in projects exceeding expectations, particularly non-Azure projects, could depress returns on capital.
• Key leadership changes could affect execution stability.
• A more pronounced shift by customers toward custom software could negatively affect Microsoft's applications business.
• Rising memory costs and supply-chain constraints could affect capital-expenditure ROI.
• Uneven Commercial bookings and RPO growth could weaken confidence in future revenue visibility.

What to watch

• 1Q FY26 Azure growth guidance and the timing and magnitude of Azure growth over the next four quarters.
• The pace of the Fairwater capacity ramp and how new capacity translates into Azure and M365 growth.
• Computing-capacity allocation among third-party Azure demand, first-party applications such as Copilot, and internal Microsoft AI research.
• Enterprise customer feedback on Copilot, E7, and Frontier Ecosystems adoption amid LLM cost pressures.
• Future capital-expenditure plans, funding allocation, capital-structure choices, and whether debt or equity financing will be required.
• Bottlenecks in Maia 300 custom silicon, supply-chain diversification, and cost-offset measures.
• Metering, pricing, value capture, and ROI validation under consumer-oriented pricing models.