Microsoft's (MSFT) momentum in generative artificial intelligence, coupled with strong Azure performance and operating discipline, positions it for durable double-digit revenue and earnings growth through fiscal 2026 and beyond, Morgan Stanley said in a fiscal Q4 preview Tuesday.

Following a fiscal Q3 beat across all business segments, the brokerage expects Azure to maintain over 30% constant currency growth in fiscal Q4 and into H1 of fiscal 2026, supported by improving GPU supply, upbeat CIO survey data, and strengthening partner momentum tied to recent incentive changes.

Potential low-to-mid single-digit opex growth in Q4 and fiscal 26 could offset gross margin compression and deliver double-digit operating income growth in fiscal 2026. The brokerage modelled total company gross margin compression of 68.6%, 67.1%, and 66.8% for fiscal 2025, 2026, and 2027, respectively, according to the note.

Improved Azure demand in the partner ecosystem reflects better go-to-market execution, including on non-AI components, while Microsoft's AI infrastructure capacity is gradually improving. Still, some supply constraints are expected to persist exiting Q4.

The firm estimates Microsoft has absorbed $4.4 billion in cumulative losses from OpenAI through Q3 2025, with the $13 billion cap on its investment likely to be reached in Q4 2026. That dynamic represents a headwind for EPS through fiscal 2026, but could set up a sharp reacceleration in fiscal 2027, with earnings growth forecast at 20%.

Morgan Stanley reiterated its overweight rating on the stock, with a $530 price target.

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