Sometimes, the best value picks are the ones that have been hiding in plain sight all along. And while Morgan Stanley has more than a handful of top picks for the new year, I do find that one of its top large-cap software picks for 2026 to be intriguing but not at all surprising. Undoubtedly, shares of Microsoft (NASDAQ:MSFT | MSFT Price Prediction) are a favored pick by many big-name pundits and investors for the new year, and it’s no mystery as to why.
It’s one of the leading big forces as the AI revolution enters yet another year, one that could show greater applicability and, with that, monetization potential. Of course, Microsoft Copilot hasn’t yet lived up to its full potential. And while Microsoft’s AI might have more than its fair share of critics, I do think 2026 is a year where Microsoft can impress, delight, and perhaps silence the skeptics as the firm looks to level up its AI game meaningfully.
With Morgan Stanley and others expecting big things from the enterprise software giant this year, it may be a good time to give the shares a second look as they start 2026 in a bit of a difficult spot, down around 12% from last year’s all-time highs just north of $542 per share. While Microsoft stock isn’t the only mega-cap AI darling to fall into correction territory (that marks a 10% decline from peak to trough), it certainly stands out as a name that’s perhaps less deserving of such a big hit, especially as the S&P 500 marches to new heights with a new slate of stocks leading it higher.
Morgan Stanley is bullish on Microsoft for 2026. It’s all about Azure, AI and potential margin gains
With a $650 price target, one of the higher price targets on Microsoft shares, Morgan Stanley is looking at north of 35% upside from current levels. Not a bad return from one of the most-owned blue chips in the market! While time will tell what allows the stock to move on from its recent slump, I do think that there are plenty of drivers that can help reignite enthusiasm in a name that’s perhaps less exciting despite its favorable positioning in the AI race.
Looking ahead, Morgan Stanley’s Keith Weiss views Azure as a strong point, and it’s not just about its growth potential either. Azure’s AI margins might have a bit of room for upside, and that might help Microsoft pole-vault over expectations in the coming quarter. Whenever you have greater AI adoption alongside higher margins, you could have the formula for a significant earnings growth spurt. If Microsoft plays its cards right, perhaps there’s room for AI-induced margin expansion more broadly.
Copilot has room to run in the enterprise and with consumers
If Microsoft can make Copilot a lot better in the new year, perhaps GitHub, Windows, Office, and maybe even Xbox (Microsoft recently added Copilot to the Xbox app) can be made a whole lot better, and perhaps customers will be happier to pay up. While Copilot might not be perfect, it is getting better, and, with that, perhaps CEO Satya Nadella has what it takes to help AI become more sophisticated, shedding the “slop” label that some critics and skeptics may be quick to assign to AI products.
In any case, there’s a big opportunity for Microsoft to hit the ball out of the park with AI and Copilot. Even if Copilot can’t level up, its OpenAI partnership and red-hot Azure cloud business seem to be big drivers that I wouldn’t seek to bet against, especially as AI adoption looks to pick up across the enterprise.
In many ways, Microsoft stands out as an obvious enterprise AI winner, but it also stands to gain on the consumer side, with Xbox and, yes, even Copilot, which has been made more personable with the Mico avatar.
Who knows? Copilot might be a sleeper AI pick to win over the hearts of everyday consumers, with its GPT-5.2 and its new face in Mico. Add the Edge browser redesign into the equation, and I think Microsoft’s consumer-facing Copilot represents a growth engine that many might be underestimating because of past adoption challenges. As Microsoft improves Copilot while moving to agents, 2026 is an interesting time for the AI-driven software titan.
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