After Earnings, Is Microsoft Stock a Buy, a Sell, or Fairly Valued?

Microsoft released its fiscal fourth-quarter earnings report on July 29. Here’s Morningstar’s take on Microsoft’s earnings and stock.

Key Morningstar Metrics for Microsoft

• Fair Value Estimate
  : $600.00
• Morningstar Rating
  : ★★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Medium

What We Thought of Microsoft’s Fiscal Q4 Earnings

Microsoft’s fourth-quarter results topped the high end of guidance on key items. Revenue increased 17% year over year in constant currency to $90.0 billion, versus the high end of guidance of $87.8 billion, while operating margin was 45.1%, compared with the high end of guidance implied at 44.7%.

Why it matters: Results are good overall, as Azure growth and all three segments beat the high end of guidance. Further, the outlook is slightly ahead of our model for the first quarter. Critically, we see strength in Azure, in both traditional and artificial intelligence workloads, which is pulling along other AI solutions.

• Near-term demand indicators remain robust. Commercial bookings grew 18% year over year in constant currency, excluding OpenAI, and grew 11%, including OpenAI. Remaining performance obligation was up 84% to $678 billion, about 30% of which will be recognized in the next 12 months.
• Demand for Azure AI services is surging, which is a clear long-term positive. While Azure remains capacity-constrained, both traditional and AI workloads were strong. Azure growth was 43% in constant currency for the quarter, surpassing guidance of 39.5%, while capital expenditure grew 110%.

The bottom line: We keep our fair value estimate for wide-moat Microsoft at $600 per share, while raising our growth forecast and offsetting it with a margin decrease due to higher Azure capital expenditure. The stock remains one of our top picks.

Coming up: First-quarter guidance is slightly ahead of both FactSet consensus and our own estimates, and includes $90.4 billion in revenue, 48.5% implied operating margin, and $4.70 in implied EPS at the midpoints. Capital expenditure is guided to $50 billion.

Big picture: Results are consistent with our long-term thesis, which centers on the expansion of hybrid cloud environments, the proliferation of AI, and Azure. We center our growth estimates mainly around Azure, Microsoft 365 Copilot traction, and uptake of other AI solutions.

• With its 4-star rating, we believe Microsoft stock is moderately undervalued compared with our long-term fair value estimate.

The following are excerpts from Morningstar’s company report on Microsoft stock.

Fair Value Estimate for Microsoft Stock

Our fair value estimate of $600 per share implies a fiscal 2027 enterprise value/sales multiple of 11 times and an adjusted price/earnings multiple of 30 times. We model a five-year compound annual growth rate for revenue of approximately 16% inclusive of the Activision acquisition. We believe revenue growth will be driven by Azure, Office 365, Dynamics 365, LinkedIn, and emerging AI adoption. Azure, in particular, is the single most critical revenue driver over the next 10 years, in our view, as hybrid environments (where Microsoft excels) drive mass cloud adoption.

We believe More Personal Computing will grow modestly above GDP over the next 10 years. We also model operating margins to remain approximately steady near 47% in fiscal 2026 (actual) over the next five years, driven by gross margin pressure from a mix shift to Azure, offset by some operating leverage. We expect some interim pressure on both gross margin and operating margin in fiscal 2025 from an accounting change, Activision pressure, and investment in Azure capacity.

Read more about Microsoft’s fair value estimate.

Economic Moat Rating

For Microsoft overall, we assign a wide economic moat, arising primarily from switching costs, with network effects and cost advantages as secondary moat sources. Based on the company’s segments, we believe the productivity and business processes and intelligent cloud segments have earned wide moats, and the more personal computing unit warrants a narrow moat. We believe Microsoft’s moat will probably allow the company to earn returns in excess of its cost of capital over the next 20 years.

Read more about Microsoft’s economic moat.

Financial Strength

We believe Microsoft enjoys excellent financial strength, thanks to its strong balance sheet, growing revenue, and high and expanding margins. As of June 2026, Microsoft had $77 billion in cash and equivalents, offset by $40 billion in debt, resulting in a net cash position of $37 billion. Gross leverage is at 0.3 times fiscal 2026 EBITDA. Our base case assumes that revenue grows at a healthy pace, driven by Azure public cloud adoption, Office 365 upselling efforts, AI adoption, and broader digital transformation initiatives. We see strong margins improving further over the next several years. Free cash flow margin averaged near 30% on a normalized basis before the capital expenditure bonanza. While we do not expect a snap back, we think the company will trend back to attractive free cash flow margins over time.

Read more about Microsoft’s financial strength.

Risk and Uncertainty

We assign Microsoft an Uncertainty Rating of Medium. Microsoft faces risks that vary among the products and segments. High market share in the client-server architecture over the last 30 years means significant high-margin revenue is at risk, particularly in OS, Office, and Server. That said, the firm has transitioned much of this revenue to cloud offerings and Azure services. Microsoft has succeeded in growing revenues in a constantly evolving technology landscape. However, it must continue to drive revenue growth of cloud-based products faster than revenue declines in on-premises products.

Microsoft is acquisitive, and while many small acquisitions fly under the radar, the company has had several high-profile flops, including Nokia and aQuantive. The October 2023 acquisition of Activision for $69 billion has likely not been as smooth as bulls may have hoped.

The public cloud buildout remains in its early phases. AWS has taken the market by storm, with Azure trailing, but the two are seen as clear leaders. This is a rapidly evolving market, and Microsoft must continually adjust its offerings, add solutions to the stack, and compete with a company that has built a business around aggressive pricing. However, ongoing AI-driven investments are massive. While we do not see significant ESG risks, we note Microsoft faces strong competition in hiring software engineers, as well as risks from a potential breach within its data centers.

Read more about Microsoft’s risk and uncertainty.

MSFT Bulls Say

• Public cloud remains the present and future of enterprise computing, and Azure is a leading full-stack service for AI and more traditional public cloud workloads.
• Microsoft 365 continues to benefit from upselling into higher-priced stock-keeping units as customers are willing to pay up for better security and Teams Phone, which should continue over the next several years.
• Microsoft has monopoly-like positions in various areas (OS, Office) that serve as cash cows to help drive Azure growth.

MSFT Bears Say

• Momentum has slowed in the ongoing shift to subscriptions, particularly in Office, which is generally considered a mature product.
• Investments in new data center builds based on AI-related demand are massive and may drag down returns over time.
• Microsoft lacks a meaningful mobile presence.

This article was compiled by Irza Waraich.