Goldman Sachs Targets $610: Microsoft's AI Story Hinges on This Azure Battle

TL;DR

• Goldman Sachs maintains a Buy rating on Microsoft with a $610 price target, implying approximately 59% upside from the stock price as of July 9.
• Azure growth remains the focal point of earnings. Goldman Sachs expects Q4 growth of 40%-41%, exceeding the company's prior guidance.
• Higher capital expenditures will amplify the debate on returns. The monetization of Copilot, the Maia chip, and new capacity deployment still need to materialize.

Goldman Sachs maintained its Buy rating on Microsoft ahead of its Q4 FY26 earnings report on July 29, with a 12-month price target of $610, while also raising its medium-to-long-term capital expenditure expectations for the company. For investors, the earnings focus is not whether Microsoft is an AI winner, but whether Azure can sustain high growth amid escalating computing power investments and translate higher spending on data centers, chips, and energy into revenue, rather than dragging down free cash flow and profit margins.

Behind the $610 Target: Azure Needs to Continue Exceeding Expectations

Market data shows Microsoft's stock price at approximately $383.34 as of July 9, UTC. Based on this price, the $610 target implies a potential upside of about 59.1%.

This valuation is built on several conditions: sustained high growth in cloud demand, new data center capacity coming online as planned, no mutual crowding out of computing power allocation between Microsoft's internal AI R&D and external customers, and AI products like Copilot beginning to contribute clearer revenue and profit streams.

Azure remains the first metric to scrutinize in the earnings report.

According to Microsoft's FY26 Q3 official earnings call, Azure and other cloud services revenue grew 40% year-over-year, or 39% in constant currency. The company's FY26 Q4 guidance projects growth of 39%-40% in constant currency, noting that customer demand continues to exceed available capacity.

Goldman Sachs' report suggests Q4 Azure growth could reach 40%-41% year-over-year in constant currency, with next quarter's guidance potentially remaining in the 40%-41% range. This forecast is slightly above the company's prior guidance, but market expectations are already high. If Microsoft merely delivers cloud growth in line with these high expectations, the stock may not reward further heavy AI investments.

Microsoft also needs to explain the source of this growth. It could stem from newly released data center capacity, continued expansion of enterprise AI demand, or smoother computing power allocation between internal applications and external customers.

Over the past few quarters, the constraint on Microsoft's AI business has not been a lack of demand but a supply shortage. Azure must serve both external customers like OpenAI and support internal needs for Copilot, MAI model development, and first-party applications. When computing power is tight, cloud growth is limited by delivery capacity. If capacity deployment is too slow, capital expenditures are reflected first in cash flow and depreciation pressures.

Breakdown of Microsoft FY26 compute capacity spending by use case and external/internal computing power allocation. AI computing, MAI, and Copilot account for a significant share. Internal computing power investment has stabilized after rising over the past 12 months, a key factor in assessing whether Azure can simultaneously support customer demand and internal AI R&D.

Capital Expenditure Upgrade Continues, AI Computing Race Shows No Signs of Cooling

Microsoft has signaled higher spending. FY26 Q3 capital expenditure was $31.9 billion. The company guided Q4 CapEx above $40 billion and estimated FY2026 calendar year CapEx at approximately $190 billion, with about $25 billion attributed to higher component prices.

Goldman Sachs' report indicates that its capital expenditure expectations for Microsoft's FY2028-FY2030 have been raised by approximately 10%. Based on the report's calculations, the adjusted annual CapEx assumptions for some periods are higher than consensus market expectations, reflecting a more aggressive view of Microsoft's future computing power investments.

This is not a choice unique to Microsoft. Guidance from chipmakers like Nvidia, Broadcom, and AMD, along with capital deployment from cloud and internet giants like Google and Meta, suggests that demand for AI computing power has not significantly cooled. Hyperscale cloud providers are still preparing to expand data center, chip, and energy resources for the coming years.

For Microsoft, high investment has two sides.

On one hand, the Azure and AI product cycle remains a valuation support. Goldman Sachs' report suggests Microsoft's computing capacity could potentially expand to around 40GW by mid-2030. On the other hand, the higher the CapEx, the more investors will question whether the new computing power can translate into cloud revenue, AI subscriptions, and higher-margin businesses, rather than merely adding heavier depreciation and cash flow pressure.

Goldman Sachs' report also forecasts Microsoft FY26 revenue of $329.4 billion and EPS of $16.75, with FY27 revenue of $387.1 billion and EPS of $19.32. This set of projections implies that AI investments can both drive revenue and not persistently slow down profit release.

Consensus street estimates for hyperscale cloud providers' capital expenditures in 2026/2027. Since January, CapEx expectations for AMZN, META, GOOGL, MSFT, and ORCL have all been significantly revised upwards. MSFT's 2027 expectation has increased by 55%.

Copilot Must Monetize, Maia to Lessen GPU Dependency

Whether Microsoft's AI investments will succeed ultimately depends on two key levers: the commercialization of Copilot and the maturity of its in-house and alternative chip supply.

Copilot's logic is relatively clear. Rising usage is beneficial for software revenue expansion in the long run and has the potential to improve profit structure. However, the short-term issue is that usage volume alone does not equal revenue realization.

Microsoft disclosed in FY26 Q3 that M365 Copilot has surpassed 20 million paid seats. GitHub Copilot is also transitioning towards more usage-based and value-based pricing. The company has introduced fair usage policies for high-usage scenarios, attempting to more tightly link higher inference costs with its payment mechanism.

The market wants to see not just an increase in seats, but also user engagement, renewal willingness, and actual paid expansion on the enterprise side. If the Copilot user experience and commercialization pace do not improve synchronously, the realization of high margins from AI software will be delayed.

Chips and the supply chain represent the other front. Microsoft's in-house AI chip, Maia, is still in a catch-up phase, with maturity lagging behind some peers. Improvements in Maia 300, progress on AMD as a second source for production, and memory procurement costs will all impact Microsoft's ability to reduce its dependency on the external GPU supply chain.

The company has previously mentioned that new 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 computing power to external Azure customers while continuing internal AI R&D. If the release is uneven, competition for resources between Azure growth, internal model training, and Copilot inference demand will persist.

Xbox Restructuring is a Valuation Sideline

Away from the main AI narrative, Goldman Sachs' report also uses a Sum-of-the-Parts (SOTP) method to estimate Microsoft's gaming business value at approximately $30 billion.

On July 6, Microsoft announced a restructuring of its Xbox business. Multiple media reports indicate layoffs of around 4,800 employees, with about 1,600 from Xbox being cut immediately and approximately 3,200 more within FY27. Four studios—Compulsion, Double Fine, Ninja Theory, and Undead Labs—left the Xbox management structure. The company also reportedly streamlined some management layers.

This appears more like a business structure adjustment rather than a core earnings trade. Microsoft's gaming business still holds value, and the restructuring shows the company is cleaning up inefficient assets and scaling back some non-core spending. However, it is unlikely to replace Azure, Copilot, and AI CapEx returns in the near term as the primary factor explaining the stock's direction.

According to Goldman Sachs' SOTP valuation, Intelligent Cloud remains the largest contributor to Microsoft's enterprise value. The implied enterprise value for M365 Commercial and Consumer businesses is approximately $492 billion, corresponding to about 4x EV/Sales or 6x GAAP EBIT for 2027, which already incorporates certain disintermediation risk assumptions.

Whether the $610 Target is Realized Depends on Three Things

The outlook from this earnings preview remains relatively optimistic: Microsoft is well-positioned in AI computing, Copilot, and the agent orchestration layer, with the opportunity to continue benefiting from the AI product cycle. However, whether the $610 price target is realized depends on the earnings report and conference call providing more verifiable progress.

Azure needs to continue delivering high growth and demonstrate that new capacity can support external customer demand once it comes online. If growth merely meets already elevated market expectations, higher CapEx could instead become a point of contention.

The Maia 300 chip and AMD as a second source need to show clearer progress. Supply chain tightness, rising memory costs, and insufficient chip maturity will all affect the unit economics of Microsoft's AI investments.

Copilot, meanwhile, needs to prove its genuine ability to generate revenue. Over 20 million paid seats is just the starting point. Paid expansion on the enterprise side, usage-based billing, and user feedback will determine whether it can evolve from an AI gateway into a profit source.

The key takeaway for Microsoft's earnings is not whether AI investment will continue, but whether higher spending can be converted more quickly into Azure growth, AI software revenue, and sustainable profit margins. If these pieces of evidence remain insufficient, the debate over the return on capital expenditure will continue to weigh on the stock price.