JPMorgan: Microsoft — Early Phases of AI Diffusion; Azure Constrained by CPU Capacity, M365 Copilot Demand Solid

JPMorgan maintains an Overweight rating on Microsoft but lowers its target price from $575 to $550. FQ2 results reveal Azure constant-currency growth of 38%, aligning with expectations but constrained by CPU capacity limitations. Had all new GPU capacity been allocated to Azure, growth would have exceeded 40%. Meanwhile, M365 Copilot demonstrates robust momentum, reaching 15 million paid seats—a 160% year-over-year increase—and an estimated annual recurring revenue of roughly $4 billion.

Commercial remaining performance obligations surged to $625 billion, driven significantly by substantial commitments from OpenAI ($250 billion) and Anthropic ($300 billion). While FQ3 guidance indicates total revenue growth of 13% and Azure growth of 37-38%, slightly below market consensus, management emphasizes that supply, rather than demand, remains the primary bottleneck. FQ3 operating margin guidance sits at 45.1%.

Strategically, Microsoft raised its FY26 operating margin outlook, signaling disciplined cost management despite an aggressive capital expenditure cycle. The company's dual foundational pillars—Azure and M365 Commercial—each generate approximately $100 billion in annualized revenue. Operating profit and EPS have grown by over 20% for three consecutive quarters. Although capacity constraints may persist for several quarters before the anticipated release of GPT-6, Microsoft's long-term structural growth thesis remains intact.