Here's how Microsoft can prove the doubters wrong this earnings season

By Emily Bary

Increasing its cloud capacity is key for Microsoft, as the company can't currently meet all is AI demand due to a shortage of graphics processing units

Microsoft reports quarterly results on Wednesday afternoon.

Microsoft has been a frustrating stock for the bulls, who see its recent underperformance as out of step with a string of positive financial results.

Some on Wall Street, however, are hopeful that Microsoft (MSFT) can flip investor sentiment when it reports earnings Wednesday afternoon, coming off a 13% stock drop since its last release.

See also: Microsoft's stock may be an AI winner - but it's not acting like one

The biggest driver of Microsoft's stock performance is its Azure cloud-computing business. And there, many analysts predict a beat - at least relative to the consensus view of 37% revenue growth in constant currency. Stifel analyst Brad Reback is among those saying that 39% seems possible.

With Azure, demand isn't the issue. Microsoft and its cloud rivals don't have enough graphics processing units to meet all the customer interest in their offerings. So earnings will be less about the numbers and more about whether Microsoft can signal that its capacity pressures are easing.

"While we expect a bigger inflection in capacity over the next two quarters ... we believe that Azure growth in the 39% range" for the December quarter and an outlook calling for 36% to 37% growth in the March quarter "would be positively received," according to Evercore ISI analyst Kirk Materne.

Wall Street would "of course" like to see Microsoft hit or surpass 40% growth, he added, "but the other dynamic to consider is how much of the new capacity will Microsoft point at internal use cases vs. selling externally."

"We believe the company could accelerate Azure in a bigger way but is balancing its commercial obligations with its own internal GPU needs," he wrote, calling this "an underappreciated nuance" that makes him more confident about "the durability of Azure growth" for this calendar year.

Read: CoreWeave's stock soars. Why Nvidia's fresh bet on the company is so significant.

Though Microsoft is struggling to fulfill all its AI cloud demand, investors can get a glimpse of the company's momentum in other ways. For one, Jefferies analyst Brent Thill predicts the "largest step-up in history" on remaining performance obligations, a measure of backlog, after last quarter's $392 billion, which reflected accelerating growth of 51%.

This time around, Microsoft's $250 billion commitment from OpenAI and its $30 billion agreement with Anthropic could provide a further boost, "reinforcing unprecedented multiyear demand visibility underpinning a strong durable growth outlook for Azure" and for the Microsoft 365 Commercial business, Thill wrote. Microsoft 365 Commercial includes Word, PowerPoint and other workplace applications.

Another thing Microsoft's stock has going for it is that it's relatively cheap, analysts say. Thill noted that, trading at 23 times calendar 2027 earnings, Microsoft shares are less expensive than Alphabet or Amazon shares. And Deutsche Bank's Brad Zelnick said that while investors have already come to expect upside from Microsoft's forthcoming results, "valuation remains reasonable" and below the stock's five-year average when looking at estimates for 2026.

One drag on Microsoft's stock could be a bigger-than-expected surge in capital expenditures, as that would potentially reinforce questions about whether AI spending will actually pay off. But Cantor Fitzgerald's Thomas Blakey and his team "don't expect another meaningful uptick in capex at this time," they wrote in a note to clients last week.

-Emily Bary

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01-27-26 2121ET