Microsoft (NASDAQ:MSFT) stock has underperformed since it released its FQ4 results at the end of July, falling 3%, vs. the NASDAQ’s 9% gain.
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BofA analyst Brad Sills thinks sentiment is being weighed down by “AI infrastructure momentum away from Microsoft (to Oracle),” although he is not concerned about the company’s positioning.
With the tech giant’s first fiscal quarter of 2026 results set to be released next Tuesday (October 28), Sills held some discussions with several partners to assess deal momentum ahead of the readout. Most indicated that deal activity remains “healthy,” and based on the feedback, Sills now anticipates a modest 0–1% upside to his Q1 revenue forecast of $77 billion (+18.2% year-over-year, +16.2% constant currency), supported by continued workload migration to Azure and solid performance in security and applications.
The analyst now sees potential for Azure growth of 39% (+38% constant currency) compared to his base case of 38% (+37% constant currency). While strength in security was partially offset by softness in other workloads, this was mainly due to capacity constraints as customers deploy more compute-intensive workloads such as AI services, as well as enterprises taking additional time to map out multi-year strategies that further embed Microsoft’s solutions. Sills views both factors as positive for the longer term.
Meanwhile, Sills thinks Capex revisions are likely to act as a catalyst for the stock. The company continues to take a deliberate and strategic approach to expanding its AI infrastructure, keeping a balance between scaling capacity and ensuring energy independence. The analyst is encouraged by the increasing visibility around its compute investments, including Microsoft’s role in the Aligned Data Centers acquisition alongside BlackRock and Nvidia, as well as the “durable demand” for compute, highlighted by ongoing Azure capacity constraints. As a result, Sills now anticipates upward revisions to FY26 consensus Capex estimates of $115 billion (36% of revenues), which sits below his base case of $125 billion (38% of revenues).
There are other potential catalysts, including the possibility of upward revisions to the current flat margin outlook as FY26 progresses, and faster commercial Office growth than the current 14%, supported by continued momentum in E3/E5 adoption and Copilot demand through the year. “We believe that Microsoft is well positioned to participate in the AI cycle in both the application and infrastructure markets,” Sills summed up.
Sills still sees MSFT stock as a “top pick,” maintaining a Buy rating on the shares, backed by a $640 price objective. The implication for investors? Upside of 24% from current levels. (To watch Sills’ track record, click here)
Barring one skeptic, the Street wholeheartedly agrees with that stance; based on 33 Buys vs a lone Hold, the stock claims a Strong Buy consensus rating. The forecast calls for 12-month returns of 22%, considering the average target clocks in at $630.41. (See Microsoft stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.