Microsoft Stock Is Up 10% This Year. Is It Still a Buy Ahead of Earnings?

Microsoft is set to release its fiscal first-quarter 2027 earnings report on Oct. 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

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

Microsoft Earnings Release Date

• Wednesday, Oct. 28, 2026, after the close of trading

What to Watch for in Microsoft’s Q1 Earnings

• Azure growth has beaten all year. Management guided to roughly 44%–45% constant-currency revenue growth after posting 43% last quarter. Management typically sets this up for a beat, so we’ll be watching that closely. Capacity is still the constraint, rather than demand, so commentary on general demand trends and what is limiting growth in today’s environment will be important. I’ll also be watching whether commercial backlog excluding OpenAI keeps growing.
• Capex, free cash flow, and the lease change. Management guided first-quarter capex above $50 billion and committed to positive free cash flow for fiscal 2027. The calendar-2026 capex guide fell to about $175 billion from about $190 billion, but that is entirely a lease reclassification, not a spending pullback. Reported capex will understate the build from here, so I’ll watch lease commitments as well as capex.
• Margins as Azure mix rises. The guide is for fiscal-year operating margin to decline less than a point. We’ll watch Microsoft Cloud gross margin (65% last quarter), and whether operating expense stays near the guided $16.8 billion to $16.9 billion range. A key point to the bull case is that cloud margins don’t get hit much as the buildout progresses.

At about $534, shares trade roughly 11% below our $600 fair value estimate, so we see mild undervaluation in a wide-moat company that is funding a record build from operating cash flow. This is on the edge of 3-star territory, so not massively undervalued by any means.

The market isn’t doubting demand. Azure growth is near 45%, and revenue is largely contracted. It is pricing the returns on spending, as the stock trades near 29 times earnings but far higher on free cash flow. Everything comes down to the ROI of the AI buildout.

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

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 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. 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 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.

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. 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 rate Microsoft’s productivity and business processes segment as having a wide moat based on switching costs and network effects. The business world rotates around a variety of Microsoft products. Chief among them is the Office productivity suite, which completely dominates the market as a quasi-monopoly. Given how embedded Office is in business users, we think it would be very difficult to switch providers.

Microsoft’s Intelligent Cloud segment includes Azure, OpenAI, Nuance, GitHub, Visual Studio, Microsoft Intelligent Data Platform, Microsoft Fabric, and Windows Server. We assign the segment a wide moat based on high switching costs, network effects, and cost advantages.

Microsoft’s More Personal Computing segment includes Windows, Gaming, Devices, and Search. We assign the segment a narrow moat based on switching costs and network effects.

Read more about Microsoft’s economic moat.

Financial Strength

We believe Microsoft enjoys excellent financial strength, arising from 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. The public cloud buildout remains in its early phases. AWS has taken the market by storm, with Azure trailing. 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 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 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 Colin Laidley.