Goldman Sachs maintains Microsoft's “buy” rating and has set a 12-month price target of $640, according to Woofun AI. This valuation judgment is based on the strong cloud business growth and profit margin recovery shown by Microsoft in the first quarter of fiscal year 2027, although utilization of additional capacity and return on capital expenditure are still key variables that determine its long-term value.
On October 28, Goldman Sachs released a preliminary assessment report for Microsoft's first quarter of the 2027 fiscal year. According to the data, Azure revenue for the quarter increased 48% year-on-year at a fixed exchange rate, which was not only higher than the previous guidance range of 44% to 45%, but also surpassed market expectations of 45%, and was further accelerated from the 42% growth rate in the previous quarter. Boosted by this, Microsoft's stock price rose about 4% after the market. Total revenue for the quarter reached US$92.279 billion, up 19% year over year, exceeding market expectations by about 2%; adjusted earnings per share were $4.89, higher than the forecast of $4.73, which exceeded expectations by about 3%. This set of financial data provides solid revenue support for Microsoft's AI investments.
However, the core question is whether the cloud business can maintain high growth and the sustainability of profit margin improvements after the new computing power is put into use. Azure was the strongest performing growth engine this quarter, and its 48% growth rate continued the acceleration trend.
Meanwhile, Microsoft Cloud's gross margin rebounded to 66% from 65% in the previous quarter. For Microsoft, which continues to expand its AI infrastructure, changes in gross margin are an important indicator for observing whether revenue growth can be converted into profit. Although the recovery in a single quarter sends a positive signal, it is still necessary to observe the utilization of additional production capacity and changes in costs in the future to see whether continuous improvement can be achieved.
According to data compiled by Woofun AI, Goldman Sachs listed the pace and magnitude of Azure's growth in FY2027 as the main focus of the performance conference call, focusing in particular on how Microsoft distributes computing power between its own products and third-party customers, and the visibility of new data center production capacity in 2027. The distribution of computing power is directly related to the growth pace of Microsoft's different businesses: its own AI products require infrastructure support, and the cloud needs of external customers also require production capacity. When the new supply is in place and distributed to which businesses will affect the speed at which demand is converted into revenue.
In addition to Azure, the Microsoft 365 commercial cloud is showing signs of accelerated growth. According to reporting standards, M365 commercial cloud revenue increased 18% year over year at a fixed exchange rate, up from 15% in the previous quarter. If the comparable base effect of revenue recognition for the same period of the previous year was adjusted, the growth rate was 19%, compared to 16% in the previous quarter. The increase was mainly due to customer upgrades to high-end products such as Copilot, E5, and E7, which led to an increase in average revenue per user (ARPU); the increase in GitHub Copilot's usage-based consumer revenue was also a driving factor.
This means that commercializing AI can either be achieved by enterprise customers upgrading their subscriptions or contributing revenue as actual usage grows. In contrast, the growth rate of the M365 consumer cloud slowed to 16% from 22% in the previous quarter, and the performance of the enterprise side and the consumer side were divided. Goldman Sachs wanted to know more about early feedback on the E7 upgrade and how this upgrade cycle is different from the past.
At the same time, how enterprise customers use products such as Foundry to access and manage different models, and how cutting-edge deployment engineers can help customers implement AI projects are also topics of concern. In terms of capital expenditure, Microsoft invested 45.2 billion US dollars during the quarter, including financial leases, which increased 30% year over year, falling short of market expectations of about $51.7 billion and a 48% year-on-year increase. However, the investment in a single quarter fell short of expectations, which is not enough to indicate changes in the investment path throughout the year. Goldman Sachs is still awaiting management updates on capital expenditure and return on invested capital forecasts. The expenditure structure is also worth paying attention to: the share of short-term assets in capital expenditure rose from about two-thirds previously to about three-quarters.
As the asset structure changes, subsequent depreciation, utilization, and return on investment will become important variables in evaluating the economics of AI infrastructure. Order metrics are not fully accelerated. Microsoft's commercial orders fell 11% year over year at a fixed exchange rate, and Goldman Sachs mainly attributed this to a high base of 111% increase over the same period last year. Commercial remaining performance obligations (RPO, the amount of contracts signed but not recognized as revenue) increased 73% year over year, down from 84% in the previous quarter. Remaining performance obligations are still growing at a high rate, but the rate at which they are converted into revenue needs to be observed in conjunction with contract terms, delivery arrangements, and computing power supply. The year-on-year decline in commercial orders also needs to be understood in the context of last year's high base.
Goldman Sachs maintains Microsoft's “buy” rating and a 12-month target price of $640, and the valuation is based on giving it a 28 times price-earnings ratio for adjusted net profit for the next 12 months. This corresponds to an upside of approximately 20.5% compared to the October 27 closing price of $531.33 used in the report.
This judgment still faces several risks: self-developed chips are climbing slower than expected, which may limit market share growth and gross margin expansion; unexpected increases in investment in non-Azure and other projects may affect capital allocation; and changes in key management and a wider shift of customers to customized software may also put pressure on the business. As far as this quarter is concerned, Azure's growth rate, cloud gross margin, and capital expenditure combined to form a positive signal. The next step that needs to be verified is whether the new data center can be delivered as planned, whether self-developed chips can successfully climb the slope, and whether products such as Copilot can continue to drive customers to pay for upgrades. These variables will determine whether Microsoft can further transform AI requirements into revenue, profit, and cash flow.