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What has to happen in Intelligent Cloud

Model as of

This page changes Intelligent Cloud inside the complete MSFT model. Every other vertical, corporate programme and valuation assumption stays in the selected portfolio case.

MSFT forward model
Horizon
Consolidated fair value $258.91 all other verticals held in this portfolio case
Final-quarter revenue $61.74B 54% of company revenue
Explicit segment contribution $78.54B EBITDA less segment capex, before corporate items

The build outruns the return. Microsoft spent $35.8B on property and equipment in the basis quarter, more than double a year earlier, and $115.9B across fiscal 2026 against $64.6B the year before. Free cash flow FELL 23% to $19.6B while operating cash flow ROSE 30% - the gap is the entire AI build. Gross margin has already slipped to 67.2% from 68.6% because infrastructure is a lower-margin business than software, and Intelligent Cloud's operating margin is seventeen points below Productivity's. This case runs Azure decelerating from 43% while the depreciation from what has already been bought keeps arriving, and prices Microsoft as a company whose best margins are behind it.

Intelligent Cloud

Basis quarter$39.31B
Final quarter$61.74B
Implied CAGR+9%
Final revenue mix54%

The largest segment for the first time this quarter, and the reason the capital expenditure line has doubled. $39.3B of revenue, up 32%, with Azure and other cloud services up 43% and Azure passing $100B of annual revenue for the first time. Server products, Enterprise Services and GitHub sit alongside it. The operating margin is 40.6% against Productivity's 57.9%, and the gap IS the AI build: this segment consumes most of the $35.8B Microsoft spent on property and equipment in a single quarter, and the depreciation on it lands here first.

Last four quarters
2025 Q3 $30.90B Reported
2025 Q4 $32.91B Reported
2026 Q1 $34.68B Reported
2026 Q2 $39.31B Estimated
Azure and other cloud servicesServer productsEnterprise and partner servicesGitHub
Sequential growth +6.0%/qtr decaying toward +2.5% 6% a quarter against 13% just delivered. Azure grew 43%; no base case should extrapolate that.
Intelligent Cloud

Latest: $61.74B (2031Q2E)

Period Value
2024Q3 $24.09B
2024Q4 $25.54B
2025Q1 $26.75B
2025Q2 $29.88B
2025Q3 $30.90B
2025Q4 $32.91B
2026Q1 $34.68B
2026Q2 $39.31B
2026Q3E $41.04B
2026Q4E $42.68B
2027Q1E $44.23B
2027Q2E $45.69B
2027Q3E $47.08B
2027Q4E $48.39B
2028Q1E $49.63B
2028Q2E $50.81B
2028Q3E $51.92B
2028Q4E $52.99B
2029Q1E $54.01B
2029Q2E $54.99B
2029Q3E $55.92B
2029Q4E $56.83B
2030Q1E $57.70B
2030Q2E $58.55B
2030Q3E $59.38B
2030Q4E $60.18B
2031Q1E $60.97B
2031Q2E $61.74B

Assumptions & reasoning

  • Azure passed $100B of revenue in fiscal 2026 and grew 43% in the quarter against a segment growing 32%, so the non-Azure parts of this segment - server products, Enterprise Services - are growing far more slowly and are being diluted out of it.
  • Microsoft gives no capacity, megawatt or utilisation figure for Azure. It says demand exceeds supply and reports a growth rate, so this line is a growth driver by necessity rather than by choice.
  • This segment carries an assumed 70% of company capital expenditure, which is 63.8% of its own revenue in the basis quarter. Microsoft does not disclose capex by segment; the share is a judgement about where the datacenters are being built.
  • Commercial remaining performance obligation of $678B, up 84%, with a weighted average duration of 2.3 years and about 30% expected within twelve months, is mostly this segment. It is the strongest forward signal Microsoft publishes and it sits outside this model's drivers.
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