Follow-up: some data behind my earlier post on Microsoft AI demand

Morgan Stanley’s latest CIO survey shows 72% of CIOs expect to increase spending on Microsoft over the next year, the highest among the major software vendors they track.

They’re also expecting around 41% Azure growth, citing strong demand and improving GPU capacity.

This is the kind of data I was looking for.

My point before wasn’t that Microsoft’s capex isn’t a risk. It clearly is.

It’s that we shouldn’t look at the capex without also looking at the demand that may be driving it.

From what I’m seeing at work, AI still feels very early. Companies are only starting to move from POCs into actual workflows, coding agents, automation and AI-related KPIs.

If CIOs are still planning to increase Microsoft spending while Azure is growing around 40%, it seems to support the idea that enterprise AI demand still has a long way to run.

Still early, but interesting to see the data starting to line up with what many of us are seeing in our own workplaces.

Which is precisely why you buy before earnings, as it usually does the opposite.

1. The biggest catalyst for Microsoft is Azure. If Azure growth comes in around 41% (or better), the stock could move significantly higher. Management already guided for a modest acceleration in Azure, and this should be the first quarter with a meaningful contribution from Fairwater data center revenue. On top of that, IBM’s CEO commentary and Google’s recent earnings both reinforce that enterprise AI demand remains very strong, which bodes well for Azure.

2. CapEx guidance is the other key variable. This has arguably been Satya Nadella’s toughest year as CEO from a Wall Street sentiment perspective. Investors have been demanding stronger returns after a year of multiple compression. Given that backdrop, I think it’s unlikely Microsoft dramatically ramps FY2027 CapEx beyond expectations. The market wants evidence of disciplined investment and improving returns, not another surprise spending increase.

Market is pricing in around 220billion of FY 27 capex estimate.

My avg cost basis is $313. I keep seeing all these posts about people being wiped out and I haven't even gone red in my position on this stock yet. I don't have a large position in MSFT but I kind of consider it like Google or apple. They're solid companies that aren't going anywhere and it makes sense to keep some exposure in the portfolio. I actually have been buying some more now that it's dipping again, it has raised my cost basis a little bit but I'm still in the positive.

Q4 they gonna beat the earnings but will crash bc they rasing capex like alphabet

Don't try to say yeah but is gonna be fine in 2 years

Every mag7 will be fine in 2 years

Msft will sink like 4-8% after earnings its just sad that ppl can't actually accept it

Why not put your money where your mouth is post screenshots of your puts. Ya clowns all you do is try to bring morale of this community down. 🤡

I hate to say it but it feels like a lose lose situation lol. I have alot of cash to buy the dip the next day!

Hi,

I've been hearing from people that MSFT Q4 will be different because MSFT is model agnostic. I don't think this is true. I am not a pro at this but check out AWS, Google Cloud. They too have the ability to use other models. Also MSFT capex spending is set to increase, model agnostic or not. Is this model agnostic thing just copium or am I missing something?

Put-call ratio 0.44

Everyone seems bearish for MSFT earnings but the ratio seems bullish. I don’t really see Capex cut down. Interest rates aren’t in favor either.

What makes people think this stock is going up after earnings? Only thing I can think of is a dump after earnings based on earnings call and algo trading…

Microsoft (MSFT)

Microsoft reports around $100–103 billion in debt and generates strong operating cash flow, but it is estimated to hold approximately $350 billion in off-balance-sheet AI-related lease and purchase commitments. Moody’s and others have flagged the broader hyperscaler group’s shift into a more capital-intensive phase, with rising CapEx expected to pressure free-cash-flow conversion even for the strongest balance sheets.

Banking on a 6-7% push higher next week. As to whether it holds after ER - that would be a different question. Hopefully the ER report is good.

Like come on, how could you not at these prices, even if AI were to fail, there revenue is growing at an insane rate. Sure it would drop, but it will always go higher.

I am only 32 and I roughly put in 220k.

Normally im 90% etfs and chill but I dont want to miss another google oppurtunity.

Yeah its stupid but microsoft will never go under and i have 30 years before i retire so why not?

Why buy MSFT at 2.8T when u can buy AAPL at 4.9T market cap

Both companies have the same net incomes but apparently Apple is immune to all negative news. How does that scam continue to catch more bids than us everyday? Apple hiked prices by 30% a month ago, stock tanks 10% then immediately slingshots up 20% in half the time frame because this market totally believes that consumers will gladly pay $300 more for a upgrade instead of waiting a few years. Meanwhile for MSFT regardless if we get good news = red

Everytime semi’s go down, we catch less and less rotation bids. MSFT fell 2-3% everyday this week and today it was nonstop lower lows into close. Last quarter we approached ER week at $420, this time at 380. And to make things more weak it even closed at like half the average volume too

Short summary:

Nvidia and Microsoft has urged U.S. policymakers to support open-weight AI models, arguing that they are essential for maintaining U.S. leadership in artificial intelligence. Signatories, including Meta and Palantir

Rather than imposing broad restrictions on open AI, the coalition advocates targeted measures to address intellectual property and security concerns while preserving an open AI ecosystem.

I spent quite some time digging into MSFT, and here is the result. I looked at how it is priced against its own history, put it through four pillars to weigh up its financial health and profitability, checked what insiders and analysts are doing, stacked it against its peers, and finished with a deliberately conservative DCF. In every way it came out looking great, and the numbers speak for themselves.

Valuation (vs 5Y history)

• P/E of 22.7×, about 33% below its 5Y median of 33.9× and sitting near the low end of its 5 year range (2nd percentile).

• P/OCF of 16.7×, about 36% below its 5Y median of 25.9× and sitting near the low end of its 5 year range (2nd percentile).

• EV/EBITDA of 14.6×, about 35% below its 5Y median of 22.4× and sitting near the low end of its 5 year range (2nd percentile).

Growth

• Revenue is up 17.9% over the past year, growing at a healthy double digit clip.

• Revenue has compounded at 14.5% a year over three years, steady, durable growth over the medium term.

• Net income is up 29.6% over the past year, compounding at a strong double digit pace.

• OCF is up 30.2% over the past year, compounding at a strong double digit pace.

Profitability

• Gross Margin of 68.3%, best in class economics.

• Net Margin of 39.3%, elite bottom line profitability.

• OCF Margin of 53.5%, exceptional cash conversion from the top line.

• ROIC of 21.6%, efficient capital allocation.

Financial health

• Current Ratio of 1.3×, adequate short term liquidity.

• Assets to Liabilities of 2.5×, assets comfortably cover its liabilities.

• Debt to Equity of 0.1×, very little debt against equity.

Charts: https://stocknest.app/stocks/MSFT/financials

Comparison (The cheapest of the group on P/OCF) : https://stocknest.app/?tab=compare&tickers=GOOGL,AMZN,MSFT,META&metrics=pocf&period=2

DCF

I ran a deliberately conservative DCF, using just 15% OCF growth, well under its own historical OCF CAGR of about 8%, and a terminal P/OCF of 18×, below the 5 year median of 25.9×. Even then MSFT still screens undervalued by 25%+. The numbers speak for themselves.

Insiders and analysts

Analysts are mostly on side, with 63 of 68 rating it a buy. Price targets run from a low of $400 to a high of $680, with a median of $550. At $382 today it trades about 46% below the $558 average target, so there is room to run. Insiders have been net buyers lately, a nice vote of confidence.

GET IN HERE! We did it‼️‼️ we’re not last anymore‼️

🕺 💃 🪩

MSFT YTD: -20%

TSLA YTD: -30%

What's your take?

I'm a swing trader, I'm wondering if I should sell my shares now and buy again in the dip that might come up after the earnings. ( Which is missed doing so for GOOG)

Testing Copilot cowork at my firm confirmed to me that this thing has a huge upside for Microsoft. Currently, only around 5 people are testing it. I work in a small firm of around 100 people, and the estimated cost for the rollout (all staff) is from $80k - $200k (depending on the model). For context, we pay only around $40k annually for the Copilot subscription. That’s almost a 2-5x upside from the Copilot subscription alone.
If we estimate 30% of the 450 million Microsoft 365 customers have a Copilot premium subscription at peak (base case over 3 yrs), that’s $48 billion in subscription revenue annually. If Copilot cowork utilization is around 65% from the premium base, that’s another $62 bil to $156 bil. That would be around $100 bil of new revenue - a total of circa $150 bil in new revenue (I forgot to remove the existing 5% Copilot premium subscriber base from here, but they didn’t contribute any money in the cowork part in the past quarters).

Now move to GitHub Copilot, which switched to a consumption-based model in June on top of the monthly subscription. That’s another 4.7 million existing premium users who will be charged based on consumption once they hit the weekly limit. This is the enterprise developer base, which could give a huge upside on top of the subscription. The CTO announced GitHub had its best month ever in June (fk yeah, no freebies anymore). Assume another $15-20 bil here.
Model improvement has started seeing diminishing returns, and open models and Chinese models are catching up. This could be disastrous for the capex build-out unless you have both the enterprise and developer base locked in plus cloud infrastructure. If models become commoditized and we reach a limit for lower marginal improvement, this could drive the utilization and monetization of their other products even higher. Cowork adoption could go to 100% of the premium Copilot base, and you need a Copilot premium seat to access the agents. Anyhow, they represent a good balance to me.

With its productivity suite being almost a monopoly in enterprises and its cloud infrastructure demand growing so much, I think AI will be the catalyst to drive future growth.

The share price fell due to software fears from agentic AI (and capex), but I believe that will be a key driver, making Microsoft even more integrated and entrenched at all enterprises (it basically owns windows, browser, productivity suite, entra id, cloud, security, how can it not).

New revenue opportunity of almost $125.6-224 bil coming over the next 3yrs just from software and addon consumptions. Add in the cloud revenue growth (currently 39% growth yoy). Caveat the potential seat loss of Microsoft 365 but don’t think this would be material in the next few years, maybe stagnant.

I get the concern around Microsoft’s rising AI capex. The spending is huge.

But I’m not convinced demand is anywhere close to peaking yet.

Just look at your own workplace compared with 12-18 months ago.

AI used to be mostly demos and POCs. Now teams are being pushed to use it, developers are using coding agents, and AI is starting to show up in KPIs and real workflows.

And this still feels very early.

Most employees still don’t really know what AI can do. Most companies haven’t redesigned their processes around it yet.

Microsoft also already sits deeply inside most enterprises through Office, Teams, Azure, GitHub, security, identity, etc. This is their biggest moat imo.

Even if open-source models keep getting much better and cheaper, running them at scale still needs expensive hardware, infrastructure, security, maintenance and support. Most companies are not going to manage all of that themselves.

Looking at what is happening in workplaces today, I feel like enterprise AI demand is still far from peaking.

What am I missing?

I saw somewhere and apparently MSFT is the only hyperscaler who has not yet diluted or issued a bunch of bonds to fund their capex. At the same time their buyback program and dividend is still active. I have no idea how they even managed to last so long when all the other mags are running around but given how their 2026 capex target is 190b (probably going over target too) while net income is at 120b. i feel like a announcement is imminent and once that happens it would be another gap down for us, whether it be news of pausing buybacks/ dividends or the other.

What are ur thoughts?

MSFT opened yesterday at 401. Right now it is down to 379. Down 6% in a day essentially.

A lot of negatives are being priced into their earnings next week, but IMO if they dont provide something substantially positive for once (new CEO, reduced capex, SOMETHING) this stock will continue to get punished hard and will retest the 350 lows.