TL;DR
· Goldman Sachs maintains a Buy rating on Microsoft and a $610 price target, implying about 59% upside based on the July 9 closing price.
· Azure growth remains the main storyline; Goldman expects Q4 growth of 40%-41%, above the company’s prior guidance.
· Higher capital expenditures will intensify the return-on-investment debate; Copilot monetization, the Maia chip, and new capacity ramp-up still need to be delivered.

Goldman Sachs maintained a Buy rating on Microsoft ahead of its fiscal Q4 earnings report on July 29 and set a 12-month target price of $610, while also raising its expectations for long-term capital expenditures. For investors, the focus of the earnings report is not whether Microsoft is an AI winner, but whether Azure can sustain high growth while compute spending continues to be ramped up—and whether higher investments in data centers, chips, and power can be converted into revenue rather than dragging on free cash flow and profit margins.

Behind the $610 Price Target — Azure Must Continue to Beat Expectations

Market data shows that, as of July 9 UTC, Microsoft’s stock price was approximately $383.34. At that price, the $610 target implies roughly 59.1% potential upside.

This valuation is based on several assumptions: cloud demand continues to grow at a high rate; new data center capacity comes online on schedule; Microsoft’s internal AI R&D and external customers’ compute allocation do not crowd each other out; and AI products such as Copilot begin contributing clearer revenue and profit.

The metric being watched most closely in the earnings report is still Azure.

In its FY26 Q3 earnings call, Microsoft showed that Azure and other cloud services revenue grew 40% year over year, up 39% on a constant-currency basis. The company’s prior FY26 Q4 guidance was for constant-currency growth of 39%-40%, and it said that customer demand still exceeds available capacity.

Goldman’s report says that in Q4, Azure is poised to grow 40%-41% year over year on a constant-currency basis, and guidance for the next quarter may also remain in the 40%-41% range. This forecast is slightly above the company’s earlier guidance, but market expectations are already not low. If Microsoft merely delivers cloud growth in line with those high expectations, the stock may not continue to reward higher AI investments.

Microsoft also needs to explain where the growth will come from. It could be the release of capacity from new data centers; it could be continued expansion of enterprise AI demand; or it could be that compute orchestration between internal applications and external customers becomes smoother.

In the past few quarters, the constraint on Microsoft’s AI business has not been lack of demand, but tight supply. Azure must serve both external customers such as OpenAI and Microsoft’s internal needs, including Copilot, MAI model R&D, and first-party applications. When compute is tight, cloud growth becomes constrained by delivery capability. If capacity is released too slowly, capital expenditures will first show up as pressure on cash flow and depreciation.

Microsoft FY26 compute capacity expenditures split by use case and external/internal compute allocation. AI compute, MAI, Copilot, and others account for a high share; after internal compute spending rose over the past 12 months, it has moved toward a steady-state—this is key to assessing whether Azure can support both customer demand and internal AI R&D at the same time.

Capital Expenditures Keep Being Revised Up; the AI Compute Race Hasn’t Cooled

Microsoft has already signaled higher spending. FY26 Q3 capital expenditures were $31.9 billion. The company guided that Q4 capital expenditures will exceed $40 billion and expects calendar year 2026 capital expenditures of about $190 billion, of which about $25 billion will come from higher component prices.

Goldman’s report says that Microsoft’s capital expenditure expectations for fiscal years 2028-2030 were raised by about 10%. Under the report’s calculations, the adjusted portion of capital expenditures assumes amounts higher than market consensus, reflecting a more aggressive view of Microsoft’s future compute investment.

This is not a choice made by Microsoft alone. Guidance from chipmakers such as Nvidia, Broadcom, and AMD, as well as capital spending actions by cloud and internet giants such as Google and Meta, all show that AI compute demand has not clearly cooled off. Hyperscale cloud providers are still expanding data center, chip, and power resources in preparation for the coming years.

For Microsoft, higher spending cuts both ways.

On one hand, Azure and AI product cycles still provide support for valuation. Goldman’s report says that by mid-2030, Microsoft’s compute capacity could expand to around 40GW. On the other hand, the higher capital expenditures are, the more investors will ask whether the additional compute can be converted into cloud revenue, AI subscriptions, and higher-margin businesses—not only heavier depreciation and cash flow pressure.

Goldman also expects Microsoft’s FY26 revenue to be $329.4 billion with EPS of $16.75; FY27 revenue to be $387.1 billion with EPS of $19.32. The implied premise behind this set of forecasts is that AI investment can both drive revenue and not continue to slow the pace of profit recognition.

Hyperscalers’ street expectations for capital expenditures in 2026/2027. Since January, capex expectations for AMZN, META, GOOGL, MSFT, and ORCL have all been raised meaningfully; MSFT’s 2027 expected increase reaches 55%.

Copilot Needs to Be Monetized; Maia Needs to Reduce Dependence on GPUs

Whether Microsoft’s AI investments can work out ultimately comes down to two levers: the commercialization of Copilot, and the maturity of internally developed and substitute chip supply.

Copilot’s logic is relatively clear. Long-term, increasing usage is favorable for expanding software revenue and may also improve the profit structure. But in the short term, the problem is that usage itself does not equal revenue recognition.

In its FY26 Q3 disclosure, Microsoft said that paid Copilot seats for M365 had exceeded 20 million. GitHub Copilot is also shifting toward more usage-based and value-based pricing. The company has also introduced fair-use terms for high-usage scenarios, trying to bind higher inference costs and monetization mechanisms more tightly together.

What the market will look at is not only whether the number of seats keeps increasing, but also user engagement, renewal intent, and actual paid expansion on the enterprise side. If Copilot’s user experience and commercialization cadence cannot improve in sync, the timeline for high-margin AI software to be realized may be pushed out.

Chips and the supply chain are another line. Microsoft’s in-house AI chip Maia is still in a catch-up phase, with maturity lagging behind some peers. Improvements in Maia 300, production progress with AMD as a second source, and memory procurement costs will all affect Microsoft’s ability to reduce dependence on external GPU supply chains.

The company has also previously said that new supply needs to be balanced across Azure, first-party applications, R&D, and server replacements. If new supply ramp-ups go smoothly, Microsoft can deliver more compute to external Azure customers while continuing to invest in internal AI R&D. If the ramp-ups are uneven, Azure growth, internal model training, and Copilot inference demand will still end up squeezing each other.

Xbox Restructuring Is Only a Valuation Side Issue

Beyond the AI main storyline, Goldman’s report also used an SOTP approach to estimate the value of Microsoft’s gaming business at about $30 billion.

On July 6, Microsoft announced the restructuring of its Xbox business. Multiple media reports said Microsoft will lay off about 4,800 employees, including about 1,600 immediately from Xbox, with about 3,200 more remaining layoffs within FY27. Four studios—Compulsion, Double Fine, Ninja Theory, and Undead Labs—left the Xbox management system, and the company also reportedly trimmed some management layers.

This part is more like a business-structure adjustment rather than the main storyline of a financial report transaction. Microsoft’s gaming business still has value, and the restructuring also shows that the company is cleaning up low-efficiency assets and scaling back some non-core spending. But in the near term, it cannot replace the returns from Azure, Copilot, and AI capital expenditures as the key factor explaining the stock’s direction.

Based on Goldman’s SOTP valuation, Intelligent Cloud remains the largest contributor to Microsoft’s enterprise value. Microsoft’s M365 commercial and consumer businesses imply an enterprise value of about $492 billion, corresponding to about 4x EV/sales or 6x GAAP EBIT in 2027, and this already includes certain assumptions about disintermediation risk.

Can $610 Be Realized? It Depends on Three Things

The direction given in this earnings preview is still somewhat optimistic: Microsoft is well positioned in AI compute, Copilot, and the agent orchestration layer, and it has the opportunity to continue benefiting from the AI product cycle. But whether the $610 price target can be realized depends on whether the earnings report and the call provide more verifiable progress.

Azure needs to continue delivering high growth and explain whether external customer demand can be supported after new capacity comes online. If growth only matches already-high market expectations, higher capital expenditures could become a point of contention instead.

Maia 300 and AMD’s second source need to provide more clearly defined progress. Supply tightness, rising memory costs, and insufficient chip maturity will all affect the unit economics of Microsoft’s AI investments.

Copilot also has to prove real monetization capability. More than 20 million paid seats is only the starting point—enterprise-side paid expansion, usage-based billing, and user feedback will determine whether it can evolve from an AI entry point into a source of profit.

The key takeaway from Microsoft’s earnings is not whether AI spending will continue, but whether higher spending can turn into Azure growth, AI software revenue, and sustainable profit margins faster. If these pieces of evidence remain insufficient, the debate over the returns on capital expenditures will continue to weigh on the stock price from above.

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