Investing.com -- Stifel has cut its price target on Microsoft to $400, warning that Wall Street’s fiscal year 2027 gross margin estimates fail to capture the drag from Azure’s rapid growth and compressing cloud margins driven by accelerating capital expenditure.

In a note by analyst Brad Reback, Stifel models fiscal 2027 gross margins compressing approximately 450 basis points year-over-year to around 63%, which is "over 300 basis points below the 66.5% consensus."

The bank flagged that even in a scenario where Azure gross margins remain stable at fourth-quarter fiscal 2026 levels of approximately 47.5%, which it described as "highly unlikely given ongoing capex growth," fiscal 2027 gross margins would still decline around 300 basis points year-over-year.

The core issue, Stifel believes, is a revenue mix shift toward Azure, which is "growing approximately three times faster than the rest of the business," combined with ongoing Azure gross margin compression of 100 to 150 basis points quarter-over-quarter through fiscal 2027.

Stifel also noted that, unlike Oracle, which guided absolute dollar operating expenses lower year-over-year, Microsoft has guided to mid-to-upper single-digit operating expense growth "given ongoing R&D investments," limiting the offset from cost efficiencies.

On the bottom line, Stifel stated that Street fiscal 2027 EPS estimates of approximately $19.45 "could be around $1.00 too high," with growing finance lease obligations adding further drag on earnings per share growth despite management’s expected maintenance of double-digit operating income growth guidance.