‘Downside Risk Isn’t a Dealbreaker,’ Says Top Analyst John DiFucci as Microsoft Stock Heads Into Earnings

The Q1 earnings season will reach a peak next week with most of the market giants set to deliver their latest quarterly statements. Microsoft (NASDAQ:MSFT) will be among the big names under the microscope, slated to release its fiscal third-quarter report on Wednesday.

Looking ahead to the print, Guggenheim analyst John DiFucci thinks that the quarter will be something of a “mixed bag,” believing the all-important Azure faces “downside risk.”

“We see risk to F3Q26 Azure revenue growth consensus estimate of +37-38% cc (and likely buy side expectations a percent higher than guidance), as the setup implies a steep increase in New Business growth, which seems unlikely,” DiFucci, who ranks among the top 3% of Street stock experts, explained.

If F3Q unfolds as DiFucci expects, Microsoft should still be in a position to guide FQ4 Azure growth broadly in line with the 36.5% cc expected on the Street. The company’s recent track record in a similarly challenging environment, followed by upside surprises in F3Q25 and F4Q25, could help explain why some investors remain inclined to give it the benefit of the doubt, though that also introduces potential risk for the stock.

Attention will likely center on any commentary around capacity as an indicator of sustained demand, particularly after CEO Nadella noted in an April 16 X post that the Fairwater data center is ahead of schedule. Management has previously framed capacity constraints as the primary bottleneck, a rationale that applies across hyperscalers and neocloud players, which DiFucci thinks actually weakens the argument, although it was less emphasized during the F2Q earnings call.

On M365 Commercial, DiFucci expects Microsoft to meet F3Q26 expectations and guide F4Q26 in line with the Street, but sees limited upside in either quarter unless there is a clear pickup in new business growth. The company has implemented several go-to-market adjustments, including launching M365 E7, removing volume-based EA discounts, and increasing prices across the M365 suite, moves that appear aimed at reaccelerating growth in M365 Copilot.

“We continue to believe MSFT’s monopolistic position in M365 positions it more favorably to monetize incremental AI revenue versus application peers,” the analyst said on the matter.

Elsewhere, DiFucci thinks Windows OEM and Devices have the potential for “meaningful upside” in the quarter, as IDC data indicates PC shipments in developed markets were “roughly flat,” well ahead of Microsoft’s guidance for a 10% decline and the Street’s expectation of a 13% drop. That strength might not carry into F4Q, where IDC forecasts an 8% decline in developed-market shipments, implying results could come in about 250bps below Street forecasts. IDC has also cut its full-year outlook, now expecting global PC shipments to fall 11% in 2026 vs. a prior 2% decline, citing higher memory costs and rising geopolitical tensions.

“We estimate Windows OEM represents approximately 20% of the company’s profits, a particularly important consideration as the company contends with heightened margin pressure from rising depreciation costs tied to its AI infrastructure buildout,” the 5-star analyst added.

Bottom line, while DiFucci flags near-term downside risk around Azure growth, that caution does not derail his broader thesis. The analyst still views MSFT as well-positioned to monetize AI across its ecosystem, supported by its dominant M365 franchise, resilient enterprise demand, and multiple levers to sustain growth beyond a single quarter.

Against that backdrop, DiFucci assigns MSFT shares a Buy rating, and his $586 price target implies a 38% upside over the next 12 months. (To watch DiFucci’s track record, click here)

The Street’s average price target is only slightly lower; at $577.05, the figure suggests share appreciation of ~36% in the coming months. On the rating front, based on a lopsided mix of 34 Buys and 2 Holds, the analyst consensus rates MSFT a Strong Buy. (See MSFT stock forecast)

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.