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

Microsoft released its fiscal second-quarter earnings report on Jan. 28. Here’s Morningstar’s take on Microsoft’s earnings and stock.

Key Morningstar Metrics for Microsoft Stock

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

What We Thought of Microsoft’s Fiscal Q2 Earnings

Microsoft’s second-quarter results topped the high end of guidance. Revenue increased 15% year over year in constant currency to $81.3 billion, compared with the high end of guidance of $80.6 billion. The operating margin was 47.1%, compared with the high end of guidance at 45.8%.

Why it matters: Results look good as headline numbers came in ahead of our expectations on both the top and bottom lines. Both PBP and IC came in nicely ahead of the top end of guidance. Critically, we see strength in Azure, in both traditional and artificial intelligence workloads.

• Near-term demand indicators are robust. Commercial bookings grew 228% year over year in constant currency, driven by large Azure deals, including the previously announced $250 billion OpenAI commitment. RPO was up 110% (up 28% without OpenAI) to $625 billion.
• Demand for Azure AI services is surging, which is clearly a long-term positive. While Azure remains capacity-constrained, both traditional and AI workloads were strong. Azure growth was 38% in constant currency for the quarter and exceeded guidance of 37%, versus 89% growth in capital expenditure.

The bottom line: We maintain our fair value estimate for wide-moat Microsoft at $600 per share. We tweaked our model over the medium term, primarily to reflect slightly faster Azure growth and slightly lower margins to account for elevated capex. The stock remains one of our top picks.

Coming up: Third-quarter guidance is largely in line with expectations, although it is officially slightly better than our model and just shy of FactSet consensus estimates, including $81.20 billion in revenue, a 45.3% operating margin, and $3.94 in EPS at the midpoints.

Big picture: We see results as consistent with our long-term thesis, which centers on the expansion of hybrid cloud environments, the proliferation of artificial intelligence, and Azure. We center our growth estimates around Azure, Microsoft 365 E5 migration, and traction with the Power Platform.

Fair Value Estimate for Microsoft Stock

With its 4-star rating, we believe Microsoft’s 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 5-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.

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 a Morningstar Rating of Medium. The firm 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. 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.

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.