Morgan Stanley Assumes Microsoft at Overweight, $600 PT

Morgan Stanley analyst Adam Wood assumed coverage of Microsoft (NASDAQ: MSFT) with an Overweight rating and a $600 price target.

“With this report, Adam Wood is assuming coverage of Microsoft (MSFT) with an Overweight Rating and $600 PT. Azure and Copilot Are Keys to the Stock and Both Are Set to Inflect.

Azure, Copilot, and the trajectory of gross margins are becoming the clearest indicators Microsoft’s AI investments are translating into durable value creation.

Azure reflects the monetization of infrastructure demand, while Copilot reflects the monetization of AI at the application layer.

Catalyst Path: As both businesses continue to inflect, with Azure growth acceleration in C2H26 and Copilot adoption continuing to scale across the enterprise, we believe better-than-expected Azure and Copilot results in the next few quarters can serve as a catalyst for a positive re-rating.

At the same time, the trajectory of gross margins will be key in determining the long-term earnings power and ROI of Microsoft’s AI investments, with Azure AI margin improvement over-time combining with significant scale and operating leverage to sustain operating margin expansion and >20% earnings growth.

Assume Coverage at Overweight and $600 PT. 16x FY28 GAAP EPS too cheap for >20% earnings growth.

We conservatively apply 1.2x PEG / 25x PE to FY28 EPS of $23.86, discount to large-cap software peers at a 1.4x PEG, yielding 50% upside to new $600 PT.

Risk to the Upside – $$795 Bull Case: Azure AI economics resemble Core Azure from a Rev/MW and margin perspective and the market recognizes this upside (see scenarios 2 and 3 in Exhibit 7 ).

Copilot drives material M365 acceleration and operating margins expand to ~49% in FY28 driving $27+ EPS.

Risk to the Downside – $$250 Bear Case: Azure AI monetizes like bare-metal provider (see scenario 1 in Exhibit 7 ), limiting upside and margin improvement; Copilot adoption stalls due to competition and M365 growth decelerates.”

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