‘Ignore the Noise,’ Says Scotiabank About Microsoft Stock

A segment of Microsoft (NASDAQ:MSFT) investors might be concerned about a deceleration in Azure growth, but those worries are misplaced. While Azure’s year-over-year revenue expansion has softened, analysts attribute this not to a lack of demand, but to capacity constraints and timing shifts as Microsoft scales its cloud and AI infrastructure.

As Scotiabank analyst Patrick Colville puts it, it all points to a “compute cornucopia!”

Microsoft management has consistently said that Azure demand exceeds current supply. Colville sees the investment in short-lived assets, including servers and networking gear, as a “leading indicator” for when additional Azure capacity is poised to be deployed. “The surge in this spending, which we estimate grew ~70% in F1Q26, gives us incremental conviction that Azure’s growth may not decelerate as some investors fear,” the analyst explained.

Assuming there isn’t a capex mix shift, according to Colville’s “forensic analysis,” F26 Azure growth of ~41% could be achievable, which is 3ppt above consensus.

Management has guided to a slight deceleration in Q2 Azure growth to +37% on a constant-currency basis. To build confidence in Azure’s outlook, Colville believes investors should closely track spending on short-lived capital expenditures, as disclosed in Microsoft’s 10-K and 10-Q filings under Note 6, Property and Equipment – specifically “servers, network equipment, and software.”

The analyst views this as a “supporting indicator to help predict Azure revenue growth,” as his fieldwork suggests Microsoft incurs short-lived asset capex only when deployment is imminent. This spending implies that data center buildings and power infrastructure are already in place, with an estimated lag of roughly one quarter before the hardware is installed and begins contributing to revenue. With Microsoft investing more heavily this year in short-lived assets, including both GPUs and CPUs, Colville expects this to translate directly into higher Azure revenue.

Colville does concede his thesis could be wrong. On the F1Q26 earnings call, Microsoft explained that even as it accelerates the pace at which capacity is brought online, it still has to balance that incremental supply between “external Azure revenue growth” and the requirements of first-party Microsoft apps, internal R&D, and end-of-life server replacements. Although management has not stated that new capacity is being disproportionately allocated to non-Azure workloads, that outcome remains a possibility.

“Nonetheless,” says Colville, “with MSFT shares down 9% over the last three months, we don’t think expectations are overly demanding. If Azure revenue growth doesn’t decelerate throughout F26, we think MSFT shares will outperform.”

The “nice kicker” from the upcoming M365 price increases, combined with Colville’s competitive analysis that places Azure – alongside Google Cloud – at the top of the AI infrastructure landscape, reinforces the analyst’s confidence that Microsoft remains “exceptionally well-placed to capitalize on a massive cloud opportunity in 2026.”

Bottom line, Colville assigns MSFT an Outperform (i.e., Buy) rating, backed by a $650 price target. This implies the stock will deliver returns of 38% a year from now. (To watch Colville’s track record, click here)

31 other analysts join Colville in the bull camp, while an additional 2 Holds can’t detract from a Strong Buy consensus rating. Going by the $632.22 average target, a year from now, shares will be changing hands for a 32% premium. (See MSFT 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.