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

Microsoft is set to release its fiscal second-quarter 2026 earnings report on Jan. 28. Here’s Morningstar’s take on what to look for in Microsoft’s earnings and the outlook for its stock.

Key Morningstar Metrics for Microsoft Stock

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

Microsoft Earnings Release Date

• Wednesday, Jan. 28, after the close of trading

What to Watch for in Microsoft’s Fiscal Q2 Earnings

• Any data points on artificial intelligence. Microsoft is making a big bet with capex, so any green shoots here are helpful. We’re also looking for commentary on traditional workloads within AI. It was light somewhat recently and the firm took some steps to address this, which seemed to go well for the September quarter.
• Azure, which has been generally strong but capacity-constrained. Management has been talking about the capacity issues fading away, but the timing keeps getting pushed out. Business has been booming because of AI.
• Rumors have been circulating about a relatively large headcount reduction, so we’re looking for any comments. (Management has already denied it.) There were also rumors last last year that Azure wasn’t meeting sales targets and layoffs were pending. Margins should be fine, but with all the recent capex, depreciation will start ramping, and we wonder if the layoffs were in anticipation of that.
• Overall demand environment, as it’s a good read for the full earnings cycle for software. We’re also looking at signs of follow through on robust commercial business from last quarter, when bookings were up 111% year over year.
• Microsoft is one of our best ideas in software, as the company is well-positioned in both AI and public cloud, which are the two biggest secular themes in the space. Shares are down 15% over the last three months, even as fundamentals have been solid in recent quarters. Software stocks have been abysmal since July 2025, with Microsoft holding up better than average. Still, we see meaningful upside.

Fair Value Estimate for Microsoft

With its 4-star rating, we believe Microsoft stock is moderately undervalued compared with our long-term fair value estimate of $600 per share, which implies a fiscal 2026 enterprise value/sales multiple of 14 times and an adjusted price/earnings multiple of 39 times.

We model a five-year compound annual growth rate for revenue of approximately 13% inclusive of the Activision acquisition. We envision stronger revenue growth ahead as Microsoft’s prior decade was bogged down by the downturn in 2008, the complete evaporation of mobile handset revenue from the disposal of the Nokia handset business, as well as the onset of the model transition to subscriptions (which initially results in slower revenue growth). However, we believe macro and currency factors will pressure revenue in the near-term. 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 the combination of Azure, DBMS, Dynamics 365, and Office 365 will drive above-market growth as CIOs continue to consolidate vendors. We believe More Personal Computing will grow modestly above GDP over the next 10 years.

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, or PBP, and intelligent cloud, or IC, 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.

We believe customers value Microsoft’s products as stand-alone solutions and for the company’s immense product breath, and these applications are tightly integrated with one another. In our opinion, the strength of these products is crucial but should not overshadow the importance of all the solutions being offered under one umbrella by Microsoft, as customers are usually looking to consolidate vendors. These factors combine to reinforce our wide moat. As Microsoft offers a wider set of related and compelling solutions, we believe it becomes more deeply entrenched in its customers as they adopt multiple products.

Read more about Microsoft’s economic moat.

Financial Strength

We believe Microsoft enjoys a position of excellent financial strength arising from its strong balance sheet, growing revenue, and high and expanding margins. As of June 2025, Microsoft had $95 billion in cash and equivalents, offset by $43 billion in debt, resulting in a net cash position of $51 billion. Gross leverage is at 0.3 times fiscal 2025 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 has averaged near 30% over the last three years, which we expect to generally improve over time.

Read more about Microsoft’s financial strength.

Risk and Uncertainty

We assign Microsoft an Uncertainty Rating of Medium. The firm faces risks that vary among its 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. Microsoft has thus far been successful in growing revenues in a constantly evolving technology landscape, and is enjoying success in both moving existing workloads to the cloud for current customers and attracting new clients directly to Azure. 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 are completed that fly under the radar, the company has had several high-profile flops, including Nokia and aQuantive. The LinkedIn acquisition was expensive but served a purpose and seems to be working out well in our view. It is not clear how much Microsoft bought in the Permira-led Informatica LBO, and it may have been an important strategic investment, but Informatica was certainly not a growth catalyst. GitHub was expensive but strategic and seems to be shaping up as a success, while the ZeniMax deal should boost the company’s first party video game publishing efforts. The October 2023 acquisition of Activision for $69 billion has been seamless.

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.

While we do not see significant ESG risks, we note Microsoft faces strong competition for software engineers on the hiring front, and also faces risks arising from a potential data breach within its data centers.

Read more about Microsoft’s risk and uncertainty.

MSFT Bulls Say

• Public cloud is widely considered to be the future of enterprise computing, and Azure is a leading service that benefits the evolution to first to hybrid environments, and then ultimately to public cloud environments.
• 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 is slowing in the ongoing shift to subscriptions, particularly in Office, which is generally considered a mature product.
• Microsoft lacks a meaningful mobile presence.
• Microsoft is not the top player in its key sources of growth, notably Azure and Dynamics.

This article was compiled by Rachel Schlueter.