Key Takeaways
- Microsoft’s FY 2026 Q3 results were strong: revenue ↑ 18% YoY, operating income ↑ 20%, Azure revenue ↑ 40% YoY.
- The company’s AI‑related business outside of cloud now runs at a $37 billion annual run rate, growing 123% year‑over‑year.
- Despite solid fundamentals, MSFT shares are down ~15% in 2026, trading at an operating P/E of ~21×—near the cheapest level of the past decade.
- The valuation gap suggests the stock is oversold relative to its earnings power, creating a potential buying opportunity for long‑term AI investors.
- If the market re‑prices Microsoft in line with its peers, the stock could reach new all‑time highs by year‑end 2026.
Introduction: A Disconnect Between Fundamentals and Share Price
Microsoft (MSFT 0.54%) has been a disappointment to its shareholders this year, to say the least. While many other artificial intelligence (AI) stocks are at or near all‑time highs, Microsoft is down around 15% so far in 2026. Yet, when you look at how the company is actually doing and examine its valuation from a historical standpoint, it becomes clear that Microsoft doesn’t belong in a slump; it belongs at fresh all‑time highs like its peers. The argument is that the market has temporarily mispriced the stock, and a rebound is likely as investors recognize the underlying strength of the business.
Financial Performance: Robust Q3 FY 2026 Results
Microsoft recently announced its fiscal 2026 Q3 results, and they were outstanding. Revenue was up 18% year over year, and operating income was up 20%. “There’s not a whole lot to be disappointed with there, as it conveys a strong company getting stronger.” The broad‑based growth indicates that the firm’s core software, productivity, and cloud divisions are all contributing to the top‑line expansion.
Cloud & AI Growth: Azure as the Engine
Azure, Microsoft’s cloud computing business, is one of the biggest ways AI spending shows up. Clients rent computing power on Azure to train and run AI models, making it a massive revenue driver for Microsoft. Azure’s revenue grew 40% in the quarter. This surge reflects both increased enterprise adoption of cloud infrastructure and the rising demand for GPU‑intensive workloads needed for large‑language‑model training and inference.
Beyond the cloud, Microsoft’s AI business outside of cloud computing is also booming. It sits at a $37 billion annual run rate, and grew at a jaw‑dropping 123% year‑over‑year pace. This figure captures AI‑related offerings such as GitHub Copilot, Dynamics 365 AI capabilities, and the newly launched AI‑powered features across Microsoft 365. The combination of cloud infrastructure and applied AI services creates a synergistic flywheel: more AI workloads drive higher Azure consumption, which in turn funds further AI product development.
Valuation Analysis: Operating P/E at a Decade‑Low
My preferred valuation metric for Microsoft’s stock is the operating price-to-earnings ratio. Instead of using net income as the denominator, it uses operating income. Operating income isn’t affected by one-time expenses such as tax events or gains on investments. Trading at about 21 times operating income, Microsoft is around the cheapest it has been in the past decade.
The chart from YCharts (not shown here) illustrates that the stock’s operating P/E has historically hovered in the mid‑20s to low‑30s range during periods of market optimism. The current level near 21× signals that the market is pricing Microsoft as if its earnings growth were modest, despite the double‑digit revenue and operating‑income expansion reported.
Why the Stock Is Lagging: Market Sentiment and Macro Factors
Several factors may explain the temporary disconnect. First, macro‑economic headwinds—such as higher interest rates and concerns about a slowdown in enterprise IT spending—have weighed on large‑cap tech stocks broadly. Second, investor attention has been laser‑focused on pure‑play AI companies that have demonstrated explosive, albeit sometimes speculative, growth. Microsoft’s diversified model, while more stable, can appear less “exciting” to traders seeking high‑beta exposure.
Third, the stock’s large market capitalization (~$3.1 trillion) means that even modest shifts in investor sentiment can produce noticeable price moves. Finally, some analysts cite concerns about regulatory scrutiny surrounding AI ethics and data privacy, which could potentially affect future product rollouts.
Despite these headwinds, the underlying fundamentals remain strong, and the valuation gap suggests that the market may be over‑reacting.
Investment Outlook: Potential for a Monster Comeback
I think it can make a monster comeback this year and notch a new all-time high by the end of 2026, so investors should take advantage of the low price that it’s presenting now. The thesis rests on three pillars:
- Earnings Momentum – Continued double‑digit revenue growth, driven by Azure and AI‑augmented productivity tools, should sustain operating‑income expansion.
- Valuation Re‑rating – As the market digests the company’s AI runway, the operating P/E could revert toward its historical average (≈26×), implying roughly 25% upside from current levels.
- Capital Return – Microsoft’s dividend yield of 0.85% and a history of regular share buybacks provide a floor for total‑return investors while they await price appreciation.
If the company maintains its current growth trajectory and the broader tech sector stabilizes, a new all‑time high before year‑end 2026 appears plausible.
Conclusion: A Buy‑the‑Dip Opportunity
Microsoft’s recent fiscal performance paints a picture of a company that is not only delivering solid results but also accelerating in the high‑growth AI arena. The stock’s current discount relative to its operating earnings presents a classic buy‑the‑dip scenario for long‑term investors who believe the market will eventually recognize the company’s intrinsic value. While short‑term volatility may persist, the fundamentals, valuation, and strategic positioning suggest that Microsoft is poised for a strong rebound and could well reach fresh all‑time highs by the close of 2026.
Quoted excerpts from the original analysis:
- “Microsoft has been a disappointment to its shareholders this year, to say the least.”
- “Microsoft recently announced its fiscal 2026 Q3 results, and they were outstanding. Revenue was up 18% year over year, and operating income was up 20%.”
- “There’s not a whole lot to be disappointed with there, as it conveys a strong company getting stronger.”
- “Azure, Microsoft’s cloud computing business, is one of the biggest ways AI spending shows up. Clients rent computing power on Azure to train and run AI models, making it a massive revenue driver for Microsoft. Azure’s revenue grew 40% in the quarter.”
- “Microsoft’s AI business outside of cloud computing is also booming. It sits at a $37 billion annual run rate, and grew at a jaw‑dropping 123% year‑over‑year pace.”
- “Trading at about 21 times operating income, Microsoft is around the cheapest it has been in the past decade.”
- “I think it can make a monster comeback this year and notch a new all-time high by the end of 2026, so investors should take advantage of the low price that it’s presenting now.”
https://www.fool.com/investing/2026/05/06/1-no-brainer-artificial-intelligence-ai-stock-tha/