Hua Er Jie Jian Wen·2025-10-31 03:51Core Viewpoint - Microsoft’s stock price unexpectedly dropped after the release of its Q1 2026 financial report, but Morgan Stanley analysts argue that the market misinterpreted the results, overlooking significant growth acceleration signals [1][2]. Financial Performance - Commercial bookings surged by 111% year-over-year, driven by large contracts with OpenAI and several Azure deals exceeding $100 million, excluding a newly announced $250 billion contract with OpenAI [4]. - Current remaining performance obligations (cRPO) grew from 22% to 35% year-over-year, reaching $157 billion, indicating strong future revenue growth potential [4]. - Total remaining performance obligations (RPO) increased by 51% to approximately $400 billion [4]. - The company reported an earnings per share (EPS) of $3.72, slightly above market expectations, but excluding a $4 billion loss from OpenAI equity investments, the adjusted EPS would be $4.13, reflecting a 21% year-over-year growth [9]. Profitability Metrics - Gross margin reached 69.0%, exceeding market expectations by 130 basis points, while operating margin stood at 48.9%, also surpassing expectations by 230 basis points [6]. - Free cash flow increased by 33% to $25.7 billion, despite a 30% rise in capital expenditures [7]. Market Position and Future Outlook - Morgan Stanley maintains an "Overweight" rating on Microsoft, raising the target price from $625 to $650, emphasizing the company’s leadership in AI and cloud computing [2][8]. - The report highlights that the market's negative reaction to Azure's 39% growth, which was below some investors' expectations, is a misinterpretation, as demand continues to outpace supply [9]. - Microsoft is positioned at the core of major software demand trends, including cloud computing, AI, and digital transformation, presenting a buying opportunity for long-term investors [8].