Is Microsoft (MSFT) stock undervalued? Analysts believe so, despite the huge capital expenditure pla

Core Points

Strong momentum in artificial intelligence revenue

Capital investment challenges

Analyst views

Core Points

Revenue in the third quarter of fiscal year 2026 reached US$82.9 billion, a year-on-year increase of 18%

Azure cloud platform grew by 40%. It is expected to grow by 39-40% in the next quarter.

The artificial intelligence business will achieve annualized revenue of US$37 billion, a surge of 123% from the previous year.

Microsoft 365 Copilot subscriptions will increase from 15 million users to more than 20 million in three months.

Capital expenditures in 2026 are expected to be approximately US$190 billion. Cloud gross margin is expected to fall to about 64%

Microsoft delivered impressive quarterly results, but the market focus remains on its aggressive infrastructure investments.

The technology giant reported revenue of US$82.9 billion for the third quarter of fiscal 2026, a year-on-year increase of 18%. Operating income increased 20% to US$38.4 billion, and net income increased 23% to US$31.8 billion. Microsoft's cloud business segment revenue reached US$54.5 billion, a year-on-year increase of 29%.

Azure performed particularly strongly, with a quarterly growth of 40%, accelerating slightly from the previous period. Management expects growth of 39-40% in the fourth quarter on a constant exchange rate basis. Current demand continues to exceed available infrastructure capacity, indicating that Azure can achieve stronger growth if resources are in place.

Commercial residual performance obligations reached US$627 billion, doubling from the same period last year. This indicator is a strong proof of locking in future revenue.

Artificial intelligence revenue momentum is strong

Microsoft's artificial intelligence business has expanded to annualized revenue of US$37 billion, an increase of 123% from last year. This represents a substantial revenue contribution rather than experimental growth.

Microsoft 365 Copilot has more than 20 million paid subscribers, an increase from 15 million in the previous quarter. Although this still represents a small proportion of total business users, the growth trajectory suggests strong adoption.

The company has strategically expanded its partnership with OpenAI to integrate Anthropic and other vendor models into Azure. This strategy provides greater flexibility for corporate customers while reducing Microsoft's reliance on a single artificial intelligence partner.

The capital investment challenge

The complexity of the situation is that Microsoft expects capital investment to be approximately US$190 billion for the entire 2026 calendar year, which far exceeds Wall Street's previous expectations.

Building data centers, purchasing chips, and deploying network infrastructure requires huge amounts of capital. These assets are critical to meeting growing Azure and artificial intelligence needs, but will also generate higher depreciation expenses in the future.

Management predicts that cloud gross margins will compress to approximately 64% in the next quarter, due to continued investment in artificial intelligence infrastructure and increased use of Copilot.

The key question facing investors is: Can emerging artificial intelligence revenue grow fast enough to verify this level of spending? Strong utilization rates will push gross margins back. If adoption slows down, the financial equation will become more difficult to justify.

Other business segments performed steadily. Microsoft 365 business cloud revenue grew 19%, Dynamics 365 grew 22%, LinkedIn grew 12%, and search advertising (net of traffic acquisition costs) grew 11%.

The game business is currently the weakest performing sector. Xbox content and services revenue fell 5%, leading to further layoffs in the division. At present, this sector is not the core of the investment theme.

Analyst View

Wall Street remains firm in confidence. MarketBeat data shows that among 48 analysts, Microsoft received a "moderate buy" consensus rating-including 41 buy ratings, 7 hold ratings, and zero sell ratings.

The 12-month consensus target price is US$559.84, ranging from US$400 to US$870. According to MarketBeat's latest analysis, this average price target represents approximately 45% upside.

There were no sell recommendations at all among the 48 analysts, indicating that the market is confident. Analysts remain optimistic about Azure's long-term growth potential and Microsoft's ability to monetize artificial intelligence across its diversified product portfolio.

Microsoft 365 Copilot user expansion and Azure's fourth-quarter growth guidance of 39-40% will be key indicators for investors to focus on in the coming quarters.