Battle of the AI Stack: Infrastructure to Knowledge Workers – Azure and Copilot Are Set to Inflect

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Battle of the AI Stack: Infrastructure to Knowledge Workers – Azure and Copilot Are Set to Inflect

North America InsightM

Executive Summary

Azure Insights:

Despite Azure's Strong Secular Position and Modest Acceleration in Growth, Investors

Skew Negative Given the Significant Ramp in Capex vs. Still Unproven ROIC. We Think

This Sentiment Improves As Near/Medium Term Supply Drives Higher Than Expected

Azure Growth for Longer. Over the past year, Azure growth has been constrained by

supply of capacity, not by demand. Though Microsoft has brought incremental

infrastructure online, management has consistently emphasized that demand continues to

exceed available supply, while also highlighting the need to balance available capacity

across Azure, 1st-Party applications and internal R&D initiatives. Against that backdrop,

management guided Azure to grow 39-40% YoY in CC in F4Q26, while also having enough

confidence and visibility to guide to a modest acceleration in C2H26 relative to C1H26,

suggesting newly deployed capacity is beginning to convert into revenue at scale.

Importantly, this comes at a time when Microsoft has remained fairly out-of-favor with

investors at least partly due to the latest Azure growth trajectory relative to both the

pace of capex revisions and the accelerating revenue trajectories currently being delivered

by other hyperscalers (see Exhibit 4 & Exhibit 5 ).

Importantly, Investors May Be Underestimating the Magnitude And Durability of the

Upcoming Azure Acceleration – Supported by Our Capex-Implied AI Revenue and Our

Rev/MW Analyses. Historically, Azure growth has been constrained by available capacity

rather than customer demand, creating a backlog of workloads waiting to be deployed. As