Microsoft reports after ‘earnings eve surprise’ with new OpenAI deal

Microsoft (MSFT) is scheduled to report results of the first quarter of its fiscal year 2026 after the market close on Wednesday, October 29, with a conference call scheduled for 5:30 pm ET. What to watch for:

EXPECTATIONS: In its fiscal fourth quarter, the company reported earnings and revenue that beat consensus forecasts.

Satya Nadella, chairman and CEO of Microsoft, said along with the Q4 results: “Cloud and AI is the driving force of business transformation across every industry and sector. We’re innovating across the tech stack to help customers adapt and grow in this new era, and this year, Azure surpassed $75B in revenue, up 34%, driven by growth across all workloads.”

“We closed out the fiscal year with a strong quarter,” added executive vice president and CFO Amy Hood, who highlighted Microsoft Cloud revenue reaching $46.7B, up 27% year-over-year, or 25% in constant currency.

Current consensus EPS and revenue forecasts for Microsoft’s September-end quarter stand at $3.66 and $75.39B, respectively, according to data provided by S&P Global Market Intelligence.

UPGRADES: On the day following the last earnings report, KeyBanc upgraded Microsoft to Overweight from Sector Weight with a $630 price target as the firm said the fears laid out in its downgrade in April had not played out. Azure growth accelerated eight percentage points over the second half of Microsoft’s fiscal year and there was no mention of macro headwinds on the earnings call, the analyst told investors.

More recently, Guggenheim upgraded Microsoft to Buy from Neutral with a $586 price target. The firm believes Microsoft, in addition to the other hyperscalers, is a beneficiary from the artificial intelligence “casualties.” Microsoft has a “near monopoly” in the productivity suite market with its Office product and will continue to monetize AI offerings tied to that product suite, the analyst told investors in a note published on October 27. Guggenheim believes Windows is also positioned to outperform consensus estimates over the near to medium term, representing the company’s “second monopoly.”

OPENAI RESTRUCTURING: In a post to its corporate news site on October 28, OpenAI stated: “Since 2019, Microsoft and OpenAI have shared a vision to advance artificial intelligence responsibly and make its benefits broadly accessible. What began as an investment in a research organization has grown into one of the most successful partnerships in our industry. As we enter the next phase of this partnership, we’ve signed a new definitive agreement that builds on our foundation, strengthens our partnership, and sets the stage for long-term success for both organizations. First, Microsoft supports the OpenAI board moving forward with formation of a public benefit corporation and recapitalization. Following the recapitalization, Microsoft holds an investment in OpenAI Group PBC valued at approximately $135B, representing roughly 27% on an as-converted diluted basis, inclusive of all owners-employees, investors, and the OpenAI Foundation. Excluding the impact of OpenAI’s recent funding rounds, Microsoft held a 32.5% stake on an as-converted basis in the OpenAI for-profit.”

California Attorney General Rob Bonta released the following statement on Microsoft-backed OpenAI’s recapitalization plan: “Over the last year and a half, my office has conducted a robust investigation into OpenAI’s initial plan to restructure, followed by its revised plan to recapitalize. This included extensive negotiations with OpenAI, and we secured concessions that ensure charitable assets are used for their intended purpose, safety will be prioritized, as well as a commitment that OpenAI will remain right here in California. With these important concessions in place, we will not be in court opposing OpenAI’s recapitalization plan.”

Afterward, Morgan Stanley reiterated an Overweight rating and $625 price target on Microsoft, saying the agreement with OpenAI clears the “number one” overhang on the stock. Reaffirming the revenue share agreement and API exclusivity should soothe near-term tactical concerns, while a new $250B contract puts Microsoft on equal footing with Oracle (ORCL) as a core OpenAI supplier, the analyst tells investors.

Meanwhile, Evercore ISI highlighted that updated details of Microsoft’s relationship with OpenAI include the fact that the company will own an approximately 27% stake, worth about $135B, which the analyst estimates would equate to about $18 per share in value. OpenAI remains Microsoft’s frontier model partner and Microsoft continues to have exclusive IP rights and Azure API exclusivity until Artificial General Intelligence. In addition, OpenAI has contracted to purchase an incremental $250B of Azure services, though Microsoft will no longer have a right of first refusal to be OpenAI’s compute provider. The firm, which expects to get a better understanding on how the change in this relationship and structure could impact the accounting around Microsoft’s investment on the earnings call, sees the “earnings eve surprise” removing an overhang for Microsoft and keeps an Outperform rating and $625 price target on the shares.

In its own note, BofA said it sees a “plethora of positives” in a deal that the firm views as reinforcing Microsoft’s position as a leading AI infrastructure player for frontier AI. Microsoft will have a 27% stake in OpenAI with an estimated value of $135B, will retain access to OpenAI’s technology through 2032, got a commitment of $250B to Azure services, and Azure exclusivity for OpenAI API products, highlights the analyst, who reiterates a Buy rating and $640 price target on Microsoft shares.

SENTIMENT: Check out recent Media Buzz Sentiment on Microsoft as measured by TipRanks.