Microsoft Reports This Week: Cloud Growth Against a Shrinking Gross Margin Decides the Quarter

Microsoft reports results for its fiscal first quarter of 2027, covering July to September, after the market closes on Wednesday 28 October. Cloud demand is not really in doubt: the server and cloud line has grown by more than 30% for four quarters in a row. The open question is what that growth costs. Gross margin has fallen every quarter over the past year as more AI capacity has come online.

What the street expects

The consensus calls for earnings per share of $4.71 on revenue of $90.6 billion. Here is how that compares with the same quarter a year ago:

Change is simple arithmetic on the consensus and the reported figures. EPS is on the same basis as the consensus. The GAAP diluted figure for the year-ago quarter was $3.72.

Those expectations follow a strong fiscal fourth quarter. Revenue came in at $90.0 billion, so the consensus for this quarter is only slightly higher, about 0.7% above it. That gap is simple arithmetic on the two figures.

The track record

Microsoft has beaten both the EPS and revenue consensus in each of the last four quarters:

• Q4 FY2026 (June): EPS $4.74 against $4.24 expected (+11.8%); revenue $90.0bn against $87.6bn (+2.7%).
• Q3 FY2026 (March): EPS $4.27 against $4.06 (+5.2%); revenue $82.9bn against $81.4bn (+1.8%).
• Q2 FY2026 (December): EPS $4.14 against $3.90 (+6.2%); revenue $81.3bn against $80.3bn (+1.2%).
• Q1 FY2026 (September 2025): EPS $4.13 against $3.67 (+12.5%); revenue $77.7bn against $75.5bn (+2.9%).

Over the same four quarters, the margin trend has moved the other way:

• Gross margin: 69.0%, 68.0%, 67.6%, 67.2%
• Operating margin: 48.9%, 47.1%, 46.3%, 45.1%

The business is still very profitable, but every recent quarter has kept a slightly smaller share of each dollar of revenue.

The line that decides the quarter

Server products and cloud services revenue, read against gross margin. This line holds Azure and is now Microsoft's largest. It brought in $37.1 billion in the June quarter, 41% of total revenue. Year-on-year growth has edged higher every quarter:

• Q1 FY2026: +30.3%
• Q2 FY2026: +30.6%
• Q3 FY2026: +31.6%
• Q4 FY2026: +33.1%

The other side of the story is spending. On a trailing twelve-month basis, capital expenditure came to $15.61 per share against operating cash flow of $24.62 per share. Free cash flow was therefore about 37% of operating cash flow. Commentary in the week before the report put the same tension at the centre. A 24/7 Wall St. piece on 22 October described Azure demand as outpacing supply. Coverage the same day of Meta's results said that a higher AI-spending outlook had overshadowed an earnings beat. Investors are paying close attention to what capital spending buys.

The quarter reads well if server and cloud growth holds at or above the low-30s pace and gross margin stops falling from 67.2%. It reads less well if growth holds but margin drops again, because that would suggest new capacity is adding revenue at a lower margin. A slowdown in cloud growth combined with further margin erosion would be the weakest result.

Microsoft has also been in the news outside its earnings. On 22 October it published a study in Science on an AI diagnostic system, which TechCrunch reported had diagnosed complex simulated cases more than twice as often as generalist physicians. The study is unlikely to move the quarter's numbers, but it shows where the company is aiming its AI work beyond cloud infrastructure.

Valuation and the Maz Rating

The shares closed at $521.08 on 22 October, for a market value of about $3.87 trillion. That leaves them 5.9% below the 52-week high of $553.72, a gap that is simple arithmetic on the quote. The trailing P/E is 29.0. The analyst price-target consensus is $595.21, with a median of $600 and a range of $440 to $725.

Microsoft carries a Maz Rating of 4.43 out of 5 (Strong Buy) within Technology. The factor scores show a clear split:

• Profitability: 4.98, near the top of the sector
• Momentum: 4.18
• Financial Health: 3.57
• Growth: 3.16
• Valuation: 1.71, in the lowest fifth of the sector

That profile fits the debate going into the report. The quality of the business is not in question, but the price already assumes the cloud spending pays off.

Bottom line

Microsoft has a consistent record of modest revenue beats and wider EPS beats, and server and cloud growth has accelerated for four straight quarters. What is less settled is margin: gross margin has fallen from 69.0% to 67.2% and operating margin from 48.9% to 45.1% over the past year. On Wednesday, the server and cloud growth rate and the direction of gross margin, taken together, will show whether the AI build-out is still adding to profitability or starting to weigh on it.

This is a preview based on published consensus and filed accounts, not investment advice.