Microsoft Shares Are Down 2% Since Earnings. Is the Stock a Buy?

Microsoft released its fiscal first-quarter earnings report on Oct. 28. 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
  : High

What We Thought of Microsoft’s Fiscal Q1 Earnings

Microsoft’s fiscal 2027 first-quarter revenue increased 19% to $92.3 billion. Earnings per share excluding gains and losses on OpenAI investments rose 18%. Both revenue and earnings were slightly ahead of FactSet consensus.

Why it matters: Azure and Microsoft 365 cloud led revenue growth. Azure was again the key focus of the quarter, with solid results ahead of management’s guidance, and the outlook for next quarter shows additional acceleration.

• This supports our view that the company’s enterprise relationships are converting artificial intelligence demand into durable revenue, with Microsoft set to be a key beneficiary of multiple revenue streams, including direct CPU and GPU workloads, as Foundry revenue tripled year over year.
• Microsoft 365 commercial cloud revenue increased 18% in constant currency against 5% seat growth, supporting our revenue per customer thesis. We were encouraged by usage-based Copilot customers growing 75% over the quarter.

The bottom line: We maintain our $600 fair value estimate for wide-moat Microsoft. We updated our forecasts after transferring coverage to a new analyst. We now forecast mildly better revenue growth and EPS growth, alongside more intense near-term cash flow pressure.

• While the shares initially reacted positively, the broader selloff in technology and AI-related stocks last week was a drag on the stock. Shares are within 12% of our fair value estimate and up roughly 50% from recent March and June lows, trading in the 3-star range.
• We materially raised our capital expenditure forecasts, which drove our revenue projection increases. Coincidentally, first-quarter capex was lower than consensus expectations, but management predicts a reacceleration in the fiscal second half.
• Management still expects to be cash flow positive this year, with the AI buildout remaining self-funded, at least for now.

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

Fair Value Estimate for Microsoft

With its 3-star rating, we believe Microsoft’s stock is fairly valued compared with our long-term fair value estimate of $600 per share, which implies a fiscal 2027 adjusted price/earnings multiple of 30 times, roughly in line with the firm’s historical average. We project revenue and earnings per share will both grow at a compound annual rate of 17% over the next five years.

Increasing capital intensity remains one of the main concerns for investors. We forecast cash capital expenditures of $189.7 billion in fiscal 2027 and $226.3 billion in fiscal 2028, close to 47% of revenue in both years. We expect free cash flow to reach its nadir in fiscal 2027 and improve each year after that, with capital expenditures peaking on a relative basis in 2028, dropping from 47% of revenue in 2028 to 34% by 2031. That still represents a much more capital-intensive business than Microsoft’s earlier software model. More profitable use of capacity or faster adoption of paid AI services would support upside to our valuation. Persistently elevated investment needs, weaker AI utilization, or falling software monetization would pressure our valuation.

Read more about Microsoft’s fair value estimate.

Economic Moat Rating

We assign Microsoft a wide moat, based on switching costs across its commercial software and cloud businesses, network effects in Microsoft 365 and LinkedIn, and cost advantages in Azure. We have high confidence that Microsoft can earn returns above its cost of capital over the next decade and believe it is more likely than not to do so over the next two decades.

AI creates the largest challenge to the durability of Microsoft’s moat. Agents could reduce demand for paid users or weaken the application interfaces that anchor Microsoft’s customer relationships. We nevertheless expect identity, enterprise data, security, and workflow integration to remain necessary, with Microsoft able to monetize both applications and infrastructure. We expect meaningful new investment to earn more than its cost of capital, although infrastructure returns may fall below those of established software. We continue to like that Microsoft has multiple ways to monetize AI demand, and we expect the firm to remain at the center of this trend, earning excess returns from it.

Read more about Microsoft’s economic moat.

Financial Strength

We believe Microsoft enjoys excellent financial strength arising from its strong balance sheet, accelerating revenue, and high margins. As of September 2026, Microsoft had $64.5 billion in cash, cash equivalents, and short-term investments, offset by $35.5 billion in total debt, resulting in a net cash position of about $29 billion. Leverage remains quite low. So far, the company can self-fund its AI buildout, and it expects to remain cash flow positive in fiscal 2027.

Our base case assumes revenue grows at a healthy pace, driven by Azure public cloud adoption, Office 365 upselling efforts, AI adoption, and broader digital transformation initiatives. We expect the company to remain cash flow positive throughout the buildout, with capital spending intensity peaking in 2027-28 and free cash flow margins improving each year after that.

Read more about Microsoft’s financial strength.

Risk and Uncertainty

We assign Microsoft a High Uncertainty Rating, reflecting uncertainty around returns on AI infrastructure, the durability of software monetization, and the long-term cash generation supporting our valuation. A diversified customer base and recurring revenue provide stability, but the business is becoming more capital-intensive, and the technology paradigm is shifting.

Read more about Microsoft’s risk and uncertainty.

MSFT Bulls Say

• Azure can maintain rapid growth as new capacity serves contracted demand and enterprise customers expand both AI and conventional cloud workloads.
• Copilot, security upgrades, and usage pricing can lift Microsoft 365 revenue per customer even as paid user growth slows.
• Microsoft should remain at the center of the enterprise with its ability to monetize AI in multiple ways. It also has the flexibility to ramp spending up or down based on demand signals. Microsoft seems able to win under multiple scenarios.

MSFT Bears Say

• AI infrastructure spending could remain elevated, and there are no guarantees of returns on these investments, as no one knows for sure what AI-related demand will look like long-term.
• Agents could reduce paid user demand or shift work away from Microsoft applications before usage revenue offsets lost subscriptions.
• Demand from frontier AI developers is concentrated and capital-dependent; weaker customer funding could leave Microsoft with underused capacity.

This article was compiled by Colin Laidley.