TL;DR
· Goldman Sachs maintains a Buy rating for Microsoft and a $610 price target, implying about 59% upside based on the stock price as of July 9.
· Azure growth remains the main storyline in the earnings report; Goldman Sachs expects Q4 growth of 40%-41%, higher than the company’s prior guidance.
· Higher capital expenditures will intensify the debate over return on investment; monetization of Copilot fees, Maia chips, and new capacity release still need to be proven.

Ahead of Microsoft’s Q4 earnings report on July 29, Goldman Sachs reiterated its Buy rating and set a 12-month target price of $610, while also raising its outlook 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 continuing to add compute capacity, and whether higher spending on data centers, chips, and power can be converted into revenue rather than dragging on free cash flow and profit margins.

Behind the $610 target, Azure must keep beating expectations

Market data shows that as of July 9 UTC, Microsoft’s share price was about $383.34. At this level, the $610 target price implies potential upside of about 59.1%.

This setup is based on several conditions: cloud demand keeps growing at a high rate, new data center capacity comes online as planned, Microsoft’s internal AI R&D and external customer compute allocation do not crowd each other out, and AI products such as Copilot start contributing clearer revenue and profit.

The first item to be watched in the earnings report is still Azure.

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

In a note, Goldman Sachs said Azure’s constant-currency year-over-year growth in Q4 could reach 40%-41%, and next quarter’s guidance may also stay at 40%-41%. This forecast is slightly above the company’s prior guidance, but market expectations are already not low. If Microsoft merely delivers cloud growth in line with high expectations, the stock price may not keep being willing to pay for more AI investment.

Microsoft also needs to explain where the growth is coming from. It could come from the release of new data center capacity, from continued expansion of enterprise AI demand, or from smoother compute scheduling between internal applications and external customers.

Over the past several quarters, the constraint on Microsoft’s AI business has not been insufficient demand, but tight supply. Azure has to serve external customers such as OpenAI, while also supporting Microsoft’s internal Copilot, MAI model R&D, and first-party applications. When compute capacity is tight, cloud growth is limited by delivery capability. When capacity release is too slow, capital expenditures will first show up in cash flow and depreciation pressure.

Microsoft FY26 compute capacity capex broken down by use and external/internal compute allocation. AI compute, MAI, Copilot, and others make up a high proportion; after internal compute investment was raised over the past 12 months, it moves toward a steady state—this is key to judging whether Azure can simultaneously support customer demand and internal AI R&D.

Capex continues to be revised upward; the AI compute arms race isn’t cooling

Microsoft has already sent signals of higher spending. FY26 Q3 capital expenditures were $31.9 billion; the company guided that Q4 capex would exceed $40 billion and expects 2026 calendar-year capex of about $190 billion, with roughly $25 billion coming from higher component prices.

Goldman Sachs said Microsoft’s capital expenditure expectations for fiscal years 2028-2030 were raised by about 10%. Based on the note’s calculations, the revised portion of annual capex assumes levels above market consensus, reflecting a more aggressive view of Microsoft’s future compute investment.

This is not a choice by Microsoft alone. Guidance from chip makers such as Nvidia, Broadcom, and AMD, as well as capital moves by cloud and internet giants such as Google and Meta, all show that AI compute demand has not clearly cooled. Ultra-large-scale cloud companies are still preparing to expand data centers, chips, and power resources over the next few years.

For Microsoft, higher investment has two sides.

On one hand, Azure and AI product cycles still support valuation. Goldman Sachs said that by the mid-2030s, Microsoft’s compute capacity could expand to about 40GW. On the other hand, the higher the capex, the more investors will ask whether incremental compute can be converted into cloud revenue, AI subscriptions, and higher-margin businesses, rather than merely bringing heavier depreciation and cash-flow pressure.

Goldman Sachs also expects Microsoft’s FY26 revenue to be $329.4 billion and EPS to be $16.75; FY27 revenue to be $387.1 billion and EPS to be $19.32. The implied premise behind these forecasts is that AI investments can both drive revenue and not continuously slow profit release.

Capex street expectations for mega-scale cloud providers in 2026/2027. Since January, capex expectations for AMZN, META, GOOGL, MSFT, and ORCL have all been clearly raised, and MSFT’s expected capex increase for 2027 reaches 55%.

Copilot needs to be monetized; Maia aims to reduce reliance on GPUs

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

Copilot’s logic is relatively clear. Higher usage over the long term benefits the expansion of software revenue and also offers a chance to improve the profit structure. But the short-term issue is that usage itself does not equal revenue realization.

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

What the market will watch is not only that seat numbers keep increasing, but also user engagement, renewal willingness, and actual paid expansion on the enterprise side. If Copilot’s usage experience and commercialization cadence cannot improve in sync, the timing for realizing high-margin AI software may be pushed back.

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

The company previously also said that incremental supply needs to be balanced between Azure, first-party applications, R&D, and server replacement. If new supply is released smoothly, Microsoft can deliver more compute to external Azure customers while continuing to invest in internal AI R&D. If release is uneven, Azure growth, internal model training, and Copilot inference demand could still crowd each other out.

The Xbox restructuring is only a valuation-side note

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

On July 6, Microsoft announced a restructuring of the Xbox business. Multiple media outlets reported that Microsoft laid off about 4,800 employees, including about 1,600 immediately from Xbox, with about 3,200 more within FY27. Four studios—Compulsion, Double Fine, Ninja Theory, and Undead Labs—left Xbox’s management system, and the company also reportedly cut some management roles.

This part looks more like a business-structure adjustment rather than the main storyline of the earnings report. Microsoft’s gaming business still has value, and the restructuring shows the company is cleaning up low-efficiency assets and scaling back some non-core spending. However, in the short term, it can hardly replace Azure, Copilot, and AI capex return as the main factor explaining the direction of the stock price.

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

Whether $610 can be achieved depends on three things

The guidance from this earnings preview still leans optimistic: Microsoft is in a favorable position in AI compute capacity, Copilot, and agent orchestration layers, and could continue to benefit from AI product cycles. But whether the $610 target price can be realized depends on whether the earnings report and the call provide more verifiable progress.

Azure needs to keep delivering high growth and explain whether new capacity coming online can support external customer demand. If growth only meets already-high market expectations, higher capital expenditures may become a controversy point instead.

Maia 300 and AMD as a second source need to show more clearly defined progress. Tight supply chains, rising memory costs, and insufficient chip maturity will all affect the unit economics of Microsoft’s AI investments.

Copilot needs to prove its real monetization ability. More than 20 million paid seats is just a starting point; enterprise-side paid expansion, usage-based billing, and user feedback will determine whether it can turn from an AI entry point into a profit source.

The upside in Microsoft’s earnings report is not whether AI investment will continue, but whether higher spending can turn into Azure growth, AI software revenue, and sustainable profit margins faster. If these evidences are still not sufficient, the debate over capex return on investment will keep weighing on the stock price above.

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