Morgan Stanley maintains its view that Azure growth will accelerate in 1H27 relative to 2H26, and that Microsoft 365 Commercial Cloud growth will accelerate in FY27.
Zhitong Finance APP reports that Morgan Stanley has issued a research note stating that Microsoft (MSFT.US) announced extensive adjustments to its external reporting structure, effective in FY27. The company will merge its three historical operating segments—Productivity and Business Processes, Intelligent Cloud, and More Personal Computing—into two new segments: "Agents and Infra" and "Devices and Consumer." This move aims to align with the increasingly integrated internal management approach for Cloud + AI. Morgan Stanley believes this adjustment is primarily an accounting reclassification and does not alter the underlying economics. Changes to the Azure and Microsoft 365 metrics are mechanical; the bank maintains its view that Azure growth will accelerate in 1H27 relative to 2H26, and that Microsoft 365 Commercial Cloud growth will accelerate in FY27. Morgan Stanley reiterates its "Overweight" rating with a target price of $600.
Business Consolidation from Three Segments to Two: Focusing on Cloud + AI Integration
The historical distinction between Microsoft's Productivity and Business Processes and Intelligent Cloud segments no longer accurately represents the technology stack, as infrastructure, applications, and AI services increasingly operate together. The new "Agents and Infra" segment merges Microsoft's commercial cloud and software businesses into a single reporting structure, while "Devices and Consumer" consolidates the company's consumer-oriented businesses. Morgan Stanley considers this change strategically significant, as the company's reporting now increasingly reflects its integrated management of commercial cloud and AI businesses, rather than indicating changes in underlying fundamentals. This aligns with the logic of Microsoft's disclosure adjustments in 2024, when the company similarly sought to align external reporting more closely with internal operational practices.
Azure Growth Rate Mechanically Reduced by Approximately 1 Percentage Point: GitHub Spin-off Creates Cleaner KPI
Morgan Stanley believes the most important KPI change is the removal of GitHub Cloud and other developer cloud services from Azure, creating an Azure revenue metric more focused on cloud and AI consumption services. This change mechanically reduces the historical Azure growth rate for F4Q26 by approximately 1 percentage point, while Microsoft's updated F1Q27 Azure outlook is also modestly lower under the new definition. However, the bank emphasizes that these changes are mechanical and do not indicate a shift in Azure's underlying momentum, as Microsoft's previous commentary on Azure growth accelerating in 1H27 relative to 2H26 remains unchanged. Microsoft will also begin providing quarterly Azure revenue in dollar terms; restated figures show FY26 Azure revenue at $101.9 billion, enhancing visibility into the absolute scale and incremental revenue growth of the business, particularly for comparison with competitors' cloud operations.
Furthermore, the reclassification provides additional insight into GitHub's momentum: the removal of GitHub mechanically lowers the Azure growth rate, while its inclusion increases the M365 Commercial Cloud growth rate. Restated data implies that GitHub has been growing faster than the overall Azure business. This makes GitHub's growth profile more similar to JFrog, which focuses on software development, rather than Atlassian, which has a more diversified business portfolio.
Slight Upward Adjustment to M365 Commercial Cloud Metric: FY26 Revenue of $100.3 Billion; View on Accelerating Growth Unchanged
Under the new structure, GitHub Cloud and other developer services are included in M365 Commercial Cloud, driving a restated upward revision in the historical M365 Commercial Cloud growth rate, while Security Copilot represents a relatively smaller portion of the reclassification. Microsoft will also begin providing quarterly M365 Cloud revenue in dollar terms; new disclosures show that this business generated $100.3 billion in revenue in FY26. Importantly, Microsoft's previous commentary on the acceleration of M365 Commercial Cloud growth in FY27 remains unchanged, with growth drivers including Copilot, E7, and the continued migration to E5. However, the broader M365 architecture further abstracts the contribution of individual products (including Copilot and GitHub). This is similar to the broader M365 Commercial Cloud KPI introduced during Microsoft's 2024 disclosure changes, which increased the reported scale of the business but reduced the visibility of independent Copilot contributions.
Cost: Reduced Visibility into Segment-Level Gross Margins
Morgan Stanley points out that the main drawback of the new reporting structure is reduced visibility into the profitability of Microsoft's individual businesses. The broader segment definitions make it difficult for investors to observe gross margin performance for each business separately, making the overall Microsoft Cloud gross margin a more important indicator for assessing underlying cloud profitability.