Microsoft Corp (NASDAQ:MSFT)'s fiscal fourth quarter results will be a key test of the company's AI execution, with Azure growth, AI infrastructure spending and Microsoft 365 Copilot adoption expected to be the main focus when the software giant reports, according to Bank of America analysts.
The analysts wrote that "AI execution remains the central debate" heading into the results, adding that fiscal 2027 commentary on Azure growth, data center buildout and AI backlog conversion will also be closely watched.
The analysts highlighted that Azure remains the key metric for investors, with Microsoft previously guiding for 39% to 40% year-over-year growth in constant currency. They wrote that demand continues to outpace capacity, while the company's first Fairwater data center facility in Wisconsin is now fully operational, supporting the conversion of commercial remaining performance obligations (RPO) into revenue.
The analysts highlighted Microsoft's $627 billion commercial RPO balance reported last quarter and noted that management expects about 25% of that amount to be recognized over the next 12 months, which they said could help validate Microsoft's AI investment strategy.
Bank of America estimates Q4 capital expenditures, including finance leases, will total about $42 billion, up 32% from the prior quarter and 74% from a year earlier, as Microsoft continues expanding AI compute capacity. The analysts expect the higher spending to pressure free cash flow in the near term and wrote that Azure growth at or above the company's 39% to 40% outlook is likely needed to support the stock, while a weaker result could raise concerns about returns on AI investments.
The analysts also identified Microsoft 365 Copilot adoption and broader AI monetization as important proof points. Copilot reached 20 million paid seats in the third quarter after adding 5 million sequentially, while AI annual recurring revenue exceeded $37 billion, up 123% year over year. They expect both metrics to continue growing as AI capacity expands.
For the quarter, the Bank of America analysts forecast revenue of $87.4 billion, up 14.4% from a year earlier, driven by Intelligent Cloud revenue of $38.1 billion and Productivity and Business Processes revenue of $37.3 billion. They expect More Personal Computing revenue to decline 10.5% year over year to $12 billion, reflecting ongoing gaming headwinds.
The analysts reiterated a ‘Buy’ rating and a $500 price target on Microsoft shares, implying upside from current levels of about $400.
The company will report its earnings on July 29.