Which first-quarter figures beat expectations, and why did the margins move in opposite directions?

  • Microsoft FY27 first-quarter revenue was 92.279 billion US dollars, up 18.8% year over year, 0.3% above HSBC’s estimate and 1.8% above market consensus; non-GAAP earnings per share were $ 4.89, up 18.4% year over year, versus HSBC’s estimate of $ 4.83 and market consensus of $ 4.73.
  • The non-GAAP gross margin fell 1.25 percentage points year over year to 67.8%, as Azure, which has a lower gross margin, accounted for a larger share of revenue; but the non-GAAP operating margin instead rose 0.88 percentage points year over year to 49.8%. Research and development, sales, and administrative expenses together declined as a share of revenue from 20.2% in the year-earlier period to 18.0%, offsetting some of the gross-margin pressure.

Why was capex guidance cut even as Azure accelerated?

  • Azure revenue in FY27 first quarter grew 48.2% year over year to 33.165 billion US dollars, above the company’s prior growth guidance of 45%; the company expects Azure revenue to grow 49%–50% year over year in the second quarter. Meanwhile, first-quarter capex was 45.2 billion US dollars, below prior guidance of 50 billion US dollars, and Microsoft also cut its 2026 capex guidance from 175 billion US dollars to 170 billion US dollars. The company said demand for cloud infrastructure still exceeds supply.
  • HSBC is therefore focused on investment efficiency: on its measure, Azure revenue relative to the related assets had a turnover ratio of 37.2% in FY27 first quarter. Assuming capex of 50 billion US dollars is required for every 1 GW of AI compute capacity, HSBC estimates that capacity could generate about 18.586 billion US dollars in annual revenue, and on that basis estimates Azure’s pretax return on invested capital at about 15%. This is an institutional estimate, and the result depends on the investment assumptions above.

Have bookings and second-quarter profit guidance fully caught up?

  • Remaining performance obligations grew 71.6% year over year to 683 billion US dollars, compared with 684 billion US dollars in the previous quarter, indicating significant year-over-year expansion but little change quarter over quarter.
  • Microsoft’s FY27 second-quarter non-GAAP operating profit guidance is 45.2 billion US dollars, above market consensus of 44.8 billion US dollars but below HSBC’s prior forecast of 47.623 billion US dollars. Thus, the company’s guidance is strong, but still falls short of HSBC’s own expectations.

What is the valuation basis for HSBC’s higher price target?

  • HSBC raised its price target from $ 595 to $ 628 and maintained its Buy rating. The target is based on expected non-GAAP earnings per share of $ 21.66 over the next 12 months and a price-to-earnings ratio of 29 times; the report says the target implies upside of 18.3%.
  • Microsoft’s CY27 forward non-GAAP P/E ratio is 23.3 times, slightly above the software industry median of 20.3 times. HSBC believes the premium is supported by growth: it forecasts a non-GAAP EPS compound annual growth rate of 20.3% for Microsoft FY26–FY31, compared with the industry’s typical 10%–15%.