Goldman Sachs Raises Microsoft Target Price, Believing AI and Azure Milestones Are Refuting the Bearish Narrative

Overview

This report is a Goldman Sachs company research update on Microsoft Corp. (MSFT). The core conclusion is that multiple business and AI milestones disclosed by Microsoft after 3QFY26 are weakening the previously bearish views around cloud growth, returns on AI capital expenditure, and application business growth. The report maintains a BUY rating and raises the 12-month target price to $610.

Core views

Goldman Sachs remains constructive on Microsoft’s positioning in the AI ecosystem and believes 3QFY26 is an important first step in reversing several quarters of relative share price weakness. Key supports include accelerating Azure growth guidance, new capacity coming online and an improved 1P/3P mix, acceleration in Microsoft 365 commercial cloud before the full launch of E7, improved Copilot usage and seat growth, significant GPU efficiency gains from internal AI models, and a step-up in GitHub usage driving an evolution from seat-based pricing to usage-based pricing.

Analysis framework

The report evaluates Microsoft’s earnings momentum and valuation support through results comparisons, management guidance, capital expenditure planning, product usage data, AI model efficiency metrics, segment revenue performance, valuation multiples, and updated financial forecasts. On valuation, Goldman Sachs applies an unchanged 28x P/E multiple to Microsoft’s SNTM adjusted net income and updates the target price based on 3QFY26 results and guidance.

Methodology notes

• equity_valuationP/E multiple valuation

  P/E multiple valuation

  Goldman Sachs values Microsoft’s SNTM adjusted net income using an unchanged 28x P/E multiple, raising the 12-month target price from $600 to $610 accordingly.

• factor_profileGS Factor Profile

  Comparison of growth, financial returns, valuation multiples, and composite factors

  The GS Factor Profile compares a stock’s growth, financial returns, valuation multiples, and composite performance against the market and industry peers through standardized rankings; the chart shows MSFT as relatively strong in growth and financial returns.

• corporate_action_probabilityM&A Rank

  M&A target probability score

  Goldman Sachs’ M&A Rank scores from 1 to 3, where 1 indicates a higher probability of being acquired and 3 indicates a lower probability; Microsoft’s M&A Rank in this report is 3, and its impact on the target price is viewed as immaterial.

Asset mapping & comparison

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

• MSFT

  subject_company

  Strengths

  Azure growth guidance is accelerating, Microsoft 365 commercial cloud and Copilot penetration are improving, internal AI models are delivering cost efficiency gains, enterprise software channels and the customer base remain solid, and earnings and revenue forecasts still show strong growth.

  Weaknesses

  AI capital expenditure has expanded significantly, free cash flow is under near-term pressure, the share price has underperformed relatively for multiple quarters, and the market still questions whether the increase in capital expenditure matches the pace of Azure improvement.

  Comparison

  The report states that MSFT’s 3-month and 6-month absolute performance was -2.1% and -21.6%, respectively, and -4.4% and -24.3% relative to the S&P 500; 12-month absolute return was 7.7%, but -16.1% relative to the S&P 500.

  Risks

  A slower-than-expected internal silicon ramp, higher-than-expected investment in non-Azure and other projects, key management changes, and a larger negative impact on the application business from custom software migration.

• Azure

  core_growth_driver

  Strengths

  4QFY guidance reaches 39%-40% YoY growth in constant currency, while new capacity coming online and an improved 1P/3P mix support Azure acceleration earlier than expected.

  Weaknesses

  Growth improvement needs to match large-scale capital expenditure investment, otherwise it could raise concerns about unit economics and the return cycle.

  Comparison

  3QFY26 Azure grew 39% YoY in constant currency, about 1 percentage point above Goldman Sachs and consensus expectations.

  Risks

  Supply-demand constraints, capital expenditure execution, internal silicon ramp-up, and cloud competition could affect growth and gross margin expansion.

• Microsoft 365 / Copilot

  application_ai_monetization

  Strengths

  Copilot seats reached 20mn, weekly engagement reached Outlook levels, and WorkIQ integration, semantic search, and indexing improvements enhance product quality.

  Weaknesses

  Copilot seats currently account for about 4% of the M365 installed base, so commercialization remains in the early penetration stage and continued validation of paid conversion and usage intensity is needed.

  Comparison

  The report says Copilot sequential net additions were the fastest since product launch and believes commercial cloud had already accelerated before the full E7 launch.

  Risks

  If Copilot quality, usage frequency, or enterprise budget conversion falls short of expectations, incremental application business revenue may be below expectations.

• GitHub

  usage_based_pricing_catalyst

  Strengths

  GitHub usage saw a step-change increase, supporting Microsoft’s evolution from seat-based pricing to usage-based pricing.

  Weaknesses

  The report did not disclose specific quantitative data on the increase in GitHub usage, so commercialization elasticity still needs further validation.

  Comparison

  Compared with traditional seat-based pricing, usage-based pricing may capture demand expansion for AI developer tools more directly.

  Risks

  Developer tool competition, enterprise procurement cycles, and usage volatility could affect the pace of revenue realization.

Key data

• 3QFY26 total revenue$82.886bnUp 18% YoY and 2% above both Goldman Sachs’ forecast and consensus expectations.
• 3QFY26 adjusted EPS$4.275% above both Goldman Sachs’ forecast and consensus expectations, up approximately 21%-23% YoY, with a slight difference between the text and table definitions.
• Azure growth39% YoY CC3QFY26 Azure grew 39% YoY in constant currency, about 1 percentage point above Goldman Sachs and consensus expectations.
• 4QFY Azure guidance39%-40% YoY CCThe report says the company guided to Azure acceleration in 4QFY and expects modest acceleration in 1HFY.
• CY26 capital expenditure guidance$190bnImplies approximately $120bn in 2HCY26, about 45% above consensus expectations of roughly $82bn.
• Copilot seats20mnAbout 4% of the Microsoft 365 installed base, representing the fastest sequential net additions since product launch.
• MAI-Transcribe-1 GPU efficiency improvement67%Used for speech-to-text scenarios in Copilot and Teams.
• MAI-Image-2 GPU efficiency improvementup to 260%Used for image generation scenarios in Bing and PowerPoint.
• F26E/F27E/F28E revenue forecasts$329bn / $387bn / $463bnGoldman Sachs updated its revenue forecasts after results, previously $329bn / $388bn / $463bn.
• F26E/F27E/F28E adjusted EPS forecasts$16.75 / $19.47 / $23.61Previously $16.63 / $19.75 / $24.08.
• Target price$610Raised from $600, based on a 28x P/E multiple.
• Market dataMarket cap $3.2tr, enterprise value $3.1tr, 3-month ADTV $14.5bnFrom the Key Data section of the report.

Impact & implications

The report’s investment implications are positive: if Azure growth acceleration, AI capacity deployment, Copilot commercialization, and internal model efficiency improvements continue to materialize, Microsoft could recover from its prior relative weakness versus the S&P 500 and software peers. At the same time, high capital expenditure remains the core area of market disagreement, and investors need to continue verifying whether capital investment can translate into Azure growth, improved AI unit economics, and incremental application business revenue.

Risks

• A longer internal silicon ramp-up period could limit market share gains or gross margin expansion.
• Increased investment in unexpected areas, such as expanded spending on non-Azure projects, could pressure free cash flow or weigh on returns.
• Changes in key leadership could affect strategic execution and investor confidence.
• A larger shift toward custom software could negatively affect Microsoft’s application business.
• Capital expenditure growth is significant, and if Azure or AI revenue improvement does not match it, the market may continue to question investment returns.
• Goldman Sachs disclosed that it has investment banking and other business relationships with Microsoft, creating potential conflicts of interest around research objectivity.

What to watch

• Whether 4QFY Azure delivers on the 39%-40% YoY constant-currency growth guidance.
• Whether 1HFY Azure continues to accelerate modestly.
• Whether CY26 capital expenditure of $190bn and approximately $120bn of investment in 2HCY26 correspond to visible improvements in cloud revenue and AI capacity utilization.
• Copilot seats, weekly engagement, and Microsoft 365 commercial cloud revenue contribution after the E7 launch.
• Whether internal AI models and silicon such as MAI-Transcribe-1, MAI-Image-2, and MAIA 200 continue to improve unit economics.
• Whether GitHub usage and usage-based pricing translate into a larger software TAM and incremental budget share.
• Whether F26E/F27E/F28E revenue and EPS forecasts continue to be revised upward or remain stable.