Bank of America Resets Microsoft Stock Forecast After Earnings

Why It Matters

The upgraded EPS forecasts and higher price target underscore confidence in Microsoft’s AI‑driven growth, but the massive capex increase signals pressure on free cash flow and valuation risk.

Key Takeaways

• Microsoft Q3 revenue hit $82.9 B, up 18% YoY
• Azure grew 39% constant‑currency, beating consensus 38.2%
• Capex guidance $190 B for 2026, $37 B above estimates
• Microsoft 365 Copilot paid seats reach 20 M, 250% YoY growth
• BofA lifts EPS forecasts to $17.38 (2026) and sets $500 price target

Pulse Analysis

Microsoft’s latest earnings showcase the company’s dual engine of cloud dominance and AI expansion. Revenue climbed to $82.9 billion, driven by an 18% year‑over‑year rise and a 39% constant‑currency surge in Azure, which continues to outpace rivals. The rapid adoption of Microsoft 365 Copilot, now with 20 million paid seats and a 250% year‑over‑year increase, highlights how AI is becoming a core revenue pillar, reinforcing the narrative that artificial intelligence is the primary stock catalyst.

Despite the upbeat top‑line, the guidance for capital expenditures has become a focal point for investors. Bank of America’s analysts forecast more than $190 billion in capex for 2026, a $37 billion premium over Wall Street expectations, reflecting higher component pricing and aggressive infrastructure investment. This escalation could compress free cash flow and pressure margins, especially as the broader hyperscaler cohort is collectively adding $50 billion in capex this year, with industry spend projected to exceed $1 trillion by 2027. Analysts therefore weigh the trade‑off between growth momentum and cash‑generation efficiency.

BofA’s response was to raise Microsoft’s EPS estimates for 2026‑2028 and boost the price target to $500, applying a 24‑times forward P/E for 2027—well above the sector average of 18‑22. The firm cites sustained revenue growth, strong margin profiles, and the scalability of AI services as justification for the premium multiple. Nonetheless, downside risks remain, including near‑term gross‑margin pressure, rapid AI innovation from competitors, and the cyclical nature of enterprise software spending. Investors will be watching how Microsoft balances its expansive capex plan with the need to deliver consistent cash returns.