Microsoft Corp (NASDAQ:MSFT) shares have slid roughly 12% since its fiscal second-quarter results, and heading into Wednesday's fiscal third-quarter report, Jefferies thinks the stock's story is ready for a rewrite.
The culprit behind the selloff has been investor frustration over the lack of a near-term inflection in both Azure and the Microsoft 365 Commercial business. But according to Jefferies, the setup into this quarter looks better than the headlines suggest.
This quarter, the bigger focus is on Microsoft 365 Commercial and whether Copilot is actually gaining traction with enterprise customers.
Jefferies notes that M365's fiscal third-quarter guidance of 13–14% constant-currency growth implies a slight deceleration at the low end compared to recent quarters. The firm views consensus expectations for fiscal fourth-quarter growth of 14% year-over-year as reasonable, factoring in a tougher comparison offset by incremental Copilot revenue contribution.
While product checks point to continued Copilot improvements, Jefferies says investors are increasingly demanding proof of real adoption momentum. and M365 durability has become the primary driver behind Microsoft's recent multiple compression.
On the cloud side, Jefferies says investors are less fixated on the size of any Azure beat this quarter than they have been historically, largely because GPU and CPU capacity constraints are now well understood.
The firm expects Azure to deliver a beat similar in scale to last quarter, rather than the larger upside seen in prior periods, with the fiscal third-quarter guidance range of 37–38% constant-currency growth, viewed as achievable against Street estimates of around 40% reported growth.
RPO, Capex, and Margins
Jefferies isn't forecasting a sharp acceleration but expects sustained growth to continue reinforcing long-term demand visibility as customers lock in longer contracts to secure capacity.
On capex, the firm models fiscal 2026 and 2027 spend (including leases) at $141 billion and $155 billion, respectively, representing growth of roughly 60% and 10% year-over-year. Recent reports of Microsoft absorbing data center capacity originally earmarked for OpenAI are seen as further evidence of sustained AI demand.
Jefferies models operating income growth of 18% in fiscal 2026, with management expecting modest operating margin expansion despite AI investment weighing on gross margins.
At 21x calendar year 2027 estimated earnings, Microsoft trades at a discount to Alphabet at 28x and Amazon at 25x, which Jefferies views as an attractive entry point given Microsoft's enterprise AI positioning, demand visibility, and what the firm describes as a compelling long-term platform consolidation story.