Microsoft Crushes Earnings as AI Investment Proves Lucrative
Microsoft has finally cleared the cloud growth hurdle that's been impacting sentiment over recent periods, with shares popping as a result. Multi-year share underperformance and sound valuation offer a compelling opportunity for investors looking for a strong mega-cap tech option.
It’s undoubtedly been an action-packed several weeks for stocks, particularly so on the earnings front. This week, in particular, reflected a critical hurdle for the mega-cap tech giants, with most of the Magnificent 7 members on the docket.
More specifically, Microsoft MSFT was one of those on the schedule, whose results sent shares on an absolute tear thanks to a relatively more favorable CapEx outlook, an expanding Copilot customer base, and bullish cloud growth.
Microsoft Shares Soar
Microsoft posted a double-beat relative to our consensus expectations, with sales growing by 18% YoY alongside 23% YoY growth in earnings. Most importantly, the mega-cap heavyweight delivered favorable Intelligent Cloud results, a key benchmark the market has consistently scrutinized amid the billions it’s been investing in AI infrastructure.
Microsoft’s Intelligent Cloud results include Azure, its cloud computing platform that provides AI computing power to businesses. Intelligent Cloud revenue came in at $39.3 billion, beating our consensus estimate handily and growing 32% YoY. The growth rate here is mightily important from a sentiment standpoint, showing an acceleration relative to recent periods.
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Adoption of Copilot also surged throughout its FY26 to over 30 million paid seats, further underpinning the momentum the company is enjoying thanks to its AI-related investments.
Are Shares Worth a Buy?
Despite the huge surge post-earnings, keep in mind that MSFT shares are still in the red YTD, underperforming relative to the S&P 500 and many other technology peers. In fact, shares have underperformed over a longer three-year period as well, up only 35% relative to the S&P 500’s 66% gain.
Weaker-than-expected cloud growth has been the primary drag on shares over recent years, though the recent release helps crush those worries in a big way, explaining the massive pop following the results. The stock isn’t expensive, either, with the current 19.9X forward 12-month earnings multiple well beneath the 29.9X five-year median and 5-year highs of 39.1X.
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All in all, MSFT shares currently offer a compelling opportunity given the sound valuation picture and the recent underperformance over the past several years, with its Intelligent Cloud results finally clearing the critical hurdle. While many investors may already own shares, the recent results significantly reinforce why it remains a top-tier company to own for the growing AI revolution.
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This article originally published on Zacks Investment Research (zacks.com).