Microsoft (MSFT) shares edged lower ahead of the company’s fiscal first-quarter earnings report on Wednesday, with investors looking for evidence that its substantial artificial intelligence investments are translating into sustainable revenue growth.
The company is scheduled to report results after the market closes.
Analysts surveyed by FactSet expect adjusted earnings of $4.71 per share on revenue of $90.62 billion, compared with $4.13 per share and $77.67 billion in revenue in the same period last year.
Microsoft stock has gained about 12% this year, slightly below the S&P 500’s 13% advance.
Investors are assessing whether accelerating cloud demand can justify the company’s rising capital expenditure and its impact on cash flow.
Azure growth remains central to Microsoft’s outlook
Wall Street expects Microsoft’s Azure cloud platform to report revenue growth of 44.3%, up from 43% in the previous quarter.
Analysts forecast Azure revenue of $32.3 billion, with the latest report expected to provide a separate revenue figure alongside its growth rate under the company’s new reporting structure.
Azure generates revenue by providing cloud computing power, storage and AI infrastructure to customers.
Its performance has become an important measure of demand for Microsoft’s AI services as technology companies invest heavily in data centres and computing capacity.
Investors will also look for indications that infrastructure expansion can support further growth.
KeyBanc Capital Markets analyst Jackson Ader said last week that guidance for accelerating growth in the first two quarters of fiscal 2027 would support confidence in Microsoft’s ability to meet and exceed its first-quarter guidance.
Ader also highlighted plans for 31 data centres to come online in the fourth quarter, compared with 57 across the first three quarters, as an important capacity expansion.
He rates Microsoft Overweight and has a $600 price target.
AI spending weighs on free cash flow
Microsoft’s capital expenditure is expected to reach $51 billion for the quarter, approximately $10 billion more than in the previous quarter.
The spending reflects the company’s continued investment in AI infrastructure as it seeks to meet demand for cloud and AI services.
However, higher investment is putting pressure on cash generation.
Analysts expect free cash flow to fall to $7.99 billion from $25.7 billion a year earlier, a decline of about 69%.
SWBC Chief Investment Officer Chris Brigati wrote on Tuesday that the key question for large technology companies was whether AI capital expenditure would translate into sustainable revenue growth, rather than simply whether quarterly earnings met expectations.
Microsoft also confirmed that it was offering voluntary exit packages to about 60,000 employees, as it looks to manage costs while continuing to invest heavily.
The eligible group represents roughly 27% of its 223,000-strong workforce, according to media reports.
The programme follows a voluntary retirement initiative announced in April and plans disclosed in July to lay off 4,800 employees.
Analysts raise price targets ahead of results
Several brokerages increased their Microsoft price targets ahead of the earnings release, citing expectations for continued cloud growth and demand for AI services.
Scotiabank raised its target to $625 from $615 and maintained an Outperform rating.
Oppenheimer also lifted its target to $625 from $570, while Truist increased its target to $600 from $575. All three firms maintained positive ratings on the stock.
Oppenheimer said infrastructure availability, rather than demand, remained the constraint in cloud computing, supporting its expectation of sustained growth in Azure and Microsoft’s 365 software suite.
According to Koyfin, 54 of 57 analysts recommend buying Microsoft shares or hold a higher rating.
The average price target of $605.12 implies approximately 14% upside from Tuesday’s closing price.
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