Microsoft: Putting margins and returns under the microscope: Azure Edition

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Microsoft: Putting margins and returns under the microscope: Azure Edition

Deutsche Bank

Research

Rating Company Date

Buy Microsoft 26 June 2026

North America Reuters Bloomberg Rating Buy

United States MSFT.OQ MSFT US Price target (USD) 550.00 Price at 24 Jun 26 365.46

52-week range 542.07 – 356.77

TMT

Software Valuation & Risks

Putting margins and returns under the

microscope: Azure Edition BradResearchZelnickAnalyst

+1-212-250-8563

Demand for AI infrastructure has driven a real inflection in public cloud revenue

Bhavin Shah, CFA and backlog growth, enabling long-standing leaders to reaccelerate off an Research Analyst

increasingly large base and creating an opening for new Neoclouds to enter what +1-212-250-6775

had been largely an oligopoly market at significant scale. At the same time,

however, margins across the industry have come under increased pressure from Daniel Knauff

Research Associate rapid mix shift to what today is generally lower margin, less IP-rich AI

+1-415-2622041

infrastructure services and the upfront costs required to massively scale new

capacity in an effort to meet demand. This is an issue we see management teams Yash Kejriwal

across the space consistently talking about and working through, and a difficult Research Associate

one for the investment community to wrestle with as we try to dissect the +1-212-250-1203

economics of these increasingly large AI businesses within the broader public

cloud market. To put it bluntly, despite all the important questions we have about

the long-term competitive dynamics and structure of the industry, we often still

find ourselves in conversations about whether contracts already generating

revenue and/or booked in backlog actually have positive economic returns as a

basic starting point.