Microsoft Needs Azure to Keep Growing Faster Than 40% When It Reports on Oct. 28

Microsoft (NASDAQ:MSFT) is back near where it was a year ago. Shares trade around $533 as I write, less than 2% below the record close of $542.07 the stock set on Oct. 28, 2025.

In between, the tech giant's stock shed more than a third of its value, bottoming near $353 in late June. The largest leg of the rebound came after Microsoft's July earnings report, which showed revenue from Azure, the company's cloud computing platform, rising 43% year over year. For the full fiscal year, Azure revenue crossed $100 billion for the first time.

Microsoft reports again on Wednesday, Oct. 28 -- exactly a year after that record close. And I think the stock needs one thing above all from that report. Azure has to keep growing comfortably faster than 40%.

Image source: Getty Images.

A 40% line

Across Microsoft's past four reports, the stock's next-day move has tracked Azure's growth rate.

When the company posted 40% Azure growth for its fiscal first quarter of 2026 (the three months ended Sept. 30, 2025), shares lost around 3% a day later. Growth dipped to 39% in the following quarter, and the stock dropped 10% after the January report. Azure grew 40% again in the March quarter, and shares lost around 4%. Then 43% growth in the June quarter lifted the stock about 16%.

Put another way, the market seemed to see 40% as too low. Growth was holding flat while spending stayed high, and it took an acceleration to 43% to change that.

Keep in mind that Microsoft reshuffled its reporting in September, shifting GitHub's cloud services and a couple of other businesses out of Azure. This cut the June quarter's growth rate to 42% (the earlier quarters didn't change). And Oct. 28 will be the first earnings report to give Azure's quarterly revenue in dollars.

What has to go right on Oct. 28?

First, Azure has to meet its guidance. Management guided for Azure revenue to grow 44% to 45% year over year in constant currency in the September quarter. On the restated numbers, Azure pulled in $22.4 billion a year earlier, so the guidance points to around $32 billion, or about $3 billion more than the June quarter's $29.4 billion. That would almost equal the June quarter's $3.4 billion sequential rise. Azure added just $1.7 billion to $1.9 billion in each of the three quarters before that.

Second, new capacity has to keep coming. Microsoft has said for several quarters that customer demand exceeds its available capacity, so Azure's growth mainly hinges on how fast Microsoft can add more.

"All up, we added another gigawatt of capacity this quarter and remain on track to roughly double our overall capacity in just two years," CEO Satya Nadella said on the July earnings call.

Third, the spending has to show up in Azure. Microsoft guided for capital expenditures of over $50 billion in the September quarter, versus $41 billion in the June quarter and $34.9 billion a year before.

And fourth, margins need to hold. Microsoft Cloud's gross margin dropped from 68% in the September 2025 quarter to 67%, 66%, and then 65% in the June quarter. Management expected it to hold fairly steady in the September quarter. Of course, another step down might signal the faster growth is getting more expensive to produce.

A step below 40% could get expensive

Azure made up almost a third of Microsoft's revenue in fiscal 2026, which ended June 30. And it grew over twice as fast as the company's 18% pace.

Based on fiscal 2026 earnings per share of $17.95, the stock trades at around 30 times earnings. Sure, that's far below the price-to-earnings ratio of about 40 the stock had at its record close. But it arguably still assumes years of double-digit earnings growth, and Azure is probably the main reason Microsoft can deliver it.

Growth below 40% in the September quarter would mean Azure added under $2 billion sequentially -- back to the pace of the flat-growth stretch, despite over $50 billion in spending.

A January-style 10% fall from today's level would leave shares around $480, about 27 times earnings.

In the end, I don't think Microsoft needs a blowout on Oct. 28 to hit a new record. It mainly needs Azure to land near the growth management already promised, without Microsoft Cloud's margin sliding again.

That's a reasonable bar for a company growing so fast. But January showed how quickly a quarter just below 40% can cut 10% off the price, and I think shares are priced about right going into the report.

Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft. The Motley Fool has a disclosure policy.