Morgan Stanley: Microsoft Corporation (MSFT.US) solidifies leadership position in generative AI, continued strong spending intentions for Azure and M365.

Morgan Stanley released a research report on Thursday stating that Microsoft Corporation (MSFT.US) has a "very clear" leadership position in the field of Generative Artificial Intelligence (GenAI), citing the "strong demand trends" of Microsoft 365, Copilot, and Azure cloud services as evidence. Analyst Josh Baer pointed out in the report to clients that, according to a survey of Chief Information Officers (CIOs) in the second quarter, Microsoft Corporation "successfully maintained its leading position in core spending intentions, especially in acquiring GenAI spending share." Regarding Azure, 62% of CIOs expect to increase related spending in the next 12 months, higher than the 57% in the second quarter of 2025. Spending intentions for Microsoft 365 and Office 365 have also "significantly increased," with 65% of CIOs expecting to increase spending, compared to 46% and 55% in the second quarter of 2024 and 2025, respectively. Looking further ahead, product levels such as E1, E3, E5, and E7 continue to be favorable for Microsoft Corporation. 50% of CIOs expect to use the E5 level next year, while 21% indicate they will use the higher-priced E7 level. On the other hand, spending on on-premises server products is expected to decline by 0.8% in the next three years, compared to a growth of 0.9% shown in the fourth quarter of 2025. Furthermore, CIOs expect Microsoft Corporation to have the highest spending growth rate in the next year compared to other vendors, reaching 7.6%, higher than the 7.3% in the fourth quarter of 2025. The survey also shows that 72% of CIOs expect to increase net spending on Microsoft Corporation tools, higher than the 67% in the fourth quarter of 2025. Baer added, "In addition, Microsoft Corporation remains the most significant vendor in acquiring incremental GenAI spending share in 2026 and the next three years. We believe that the market undervalues the sustainability of Azure growth, the improvement in the momentum of M365 commercial cloud (and Copilot), and earnings per share growth at a valuation of currently 16 times the GAAP P/E ratio for the 2028 fiscal year." Baer gave Microsoft Corporation an "overweight" rating with a target price of $650. Microsoft Corporation will release its fourth quarter fiscal year 2026 earnings report after the U.S. stock market closes on July 29th.