Packaged Software · #6 in the Retail 100

Microsoft

MSFT

Our rating: hold
12-month target: $662.22 +27.1%
Expected vs. S&P 500: +9.3 ptsSee the math
Next earnings: Jan 27In 83 daysEarnings calls page ↗

Microsoft's backlog of signed contracts was flat at $677B last quarter and new bookings fell 12%, even as Azure grew 48%.

Summary

Microsoft sells Office, LinkedIn and Dynamics software to businesses, rents computing through Azure, and sells Windows, Xbox and Bing. Azure grew 48% last quarter and management says demand still exceeds supply, so it keeps spending heavily on data centers, which is shrinking free cash flow (cash left after capital spending). The stock depends on Azure growth paying for that build before the cost eats into profit.

$520.99

+$4.20 (+0.81%)Past year

What Microsoft does

Microsoft sells the software many companies run on and rents computing power through Azure, its cloud. About 65% of its FY2026 revenue came from cloud services that customers pay for by subscription or by use.²⁹

What it sells

Azure and servers39% of revenue, FY2026
Azure rents computing power and AI capacity, billed by use. Also includes Windows Server and SQL Server that companies run themselves.
Microsoft 365 for business31% of revenue, FY2026
Office apps, Teams, Outlook and security, sold per employee. Copilot, its AI assistant, raises what Microsoft earns per user.
Xbox7% of revenue, FY2026
Consoles, Game Pass subscriptions and games, including those from Activision Blizzard, which Microsoft bought in 2023.
LinkedIn6% of revenue, FY2026
The professional network, which earns from recruiter subscriptions, premium memberships, sales tools and ads.
Windows5% of revenue, FY2026
License fees PC makers pay for each copy of Windows they preinstall, plus Surface devices.

Who buys it

Mostly businesses, schools and governments, which sign multi-year contracts directly or through partners. OpenAI, in which Microsoft is a major investor, drove most of the past year's jump in signed future contracts to $678 billion. The U.S. was 51% of FY2026 revenue.

Where you've seen it

The price of a new Windows laptop includes a license fee the PC maker paid Microsoft.

The backstory

AI gave Microsoft more demand than it can serve. Customers have signed years of future contracts, much of them with OpenAI, but a shortage of data centers limits Azure's growth. So Microsoft is building as fast as it can, and the cost shows in its cash flow.

How the business makes money

Why Microsoft's business profits are funding its AI data centers^1,4,30,36,37

Step 1
Businesses pay Microsoft per employee for Office, Teams and Outlook. Microsoft 365 commercial cloud revenue grew 17% last quarter.
Step 2
Copilot, its AI assistant, sells to those same customers. Paid seats passed 30M in July, and Microsoft gave no newer count.
Step 3
AI gave Azure, Microsoft's cloud, more demand than it can supply. Azure sales were $33.2B last quarter, up 48%.
Step 4
So Microsoft is building data centers, $45.2B in the September quarter. Profit holds so far: it keeps about 50¢ of each $1 after running costs.
What shareholders get
Cash from the business still covers that spending, but free cash flow fell 27%. The stock is betting Azure growth pays for the build before costs eat into profit.

Advantages

Office customers are a ready market for AI

Major advantage

Microsoft's biggest advantage. It can sell AI to businesses already paying for Microsoft 365, and Copilot paid seats passed 30M in July, the latest count given.^1,2,4,8

Years of signed contracts

Strong advantage

Strong, though it leans on OpenAI and was flat from June. Customers have committed to years of spending. Oracle, by comparison, reports $664B of contracts on about a fifth of Microsoft's revenue.^1,19,28

A stake in OpenAI

Supporting

Useful, but less exclusive than it was. Microsoft owns about 27% of OpenAI and licenses its models through 2032, no longer exclusively. Its revenue share is capped through 2030.^3,10,11,21

What's changing

Azure speeds up again, but cash flow keeps shrinking

Azure sped up again, to 48% growth, and Microsoft guided 49% to 50% for the December quarter. The stock rose about 4% after hours, then faded and closed little changed the next day, as Alphabet fell about 12% on its own report. Microsoft also began reporting Azure in dollars and two new segments in this quarter's results.^{20,33,35,39,30,13}

Competitors

Who else an investor would consider, and how they compare.

Company	Market value	What it does	Compared with Microsoft
Microsoftthis stock	$3.87T	Microsoft sells the software many companies run on and rents computing power through Azure, its cloud. About 65% of its FY2026 revenue came from cloud services that customers pay for by subscription or by use.
Amazon (AWS)AMZN	$2.69T	The biggest cloud, renting computing to businesses, with its own AI chips.	AWS is bigger; Microsoft's Azure grows faster and sells alongside Office.¹⁷
Alphabet (Google Cloud)GOOGL	$3.88T	Rents cloud computing built around its own Gemini AI models and TPU chips.	Google Cloud revenue doubled last quarter; Microsoft owns the office-software customer.^18,38
OracleORCL	$381.26B	Database software company now building data centers to rent out AI computing.	Similar AI backlog, but Oracle burned cash last quarter; Microsoft funds itself.¹⁹
OpenAI (private)private	—	Makes ChatGPT and sells AI straight to businesses, now free to use any cloud.	Microsoft owns 27%, yet ChatGPT competes with Copilot inside the same companies.^10,11

Leadership

Who runs the company, and how the stock has done under the CEO.

MSFT 17xS&P 500 +432.2%Total return with dividends since Feb 2014 · log scale

201520172019202120232025

Satya NadellaChairman and CEO12 yrs

Amy HoodEVP and CFO13 yrs, since 2013

Judson AlthoffCEO, Microsoft Commercial Business1 yrs

When Nadella was named (Feb 2014), the stock moved -0.4% that day; the S&P 500 moved +0.7%.

Wall Street on Nadella: PositiveStifel upgraded the stock to Buy, saying Microsoft has clearly improved efficiency, cash generation and cloud growth. BNP Paribas said results, with Azure cloud sales up 43%, strengthen its place as a leading AI winner.^L6,L7

Leadership sources (7) · researched Oct 2026

L1Microsoft Board names Satya Nadella as CEO · Microsoft, 2014-02-04
L2Amy Hood, Executive Vice President and Chief Financial Officer · Microsoft, 2026-10-08
L3Amy Hood · Wikipedia, 2026-10-08
L4Judson Althoff, CEO, Microsoft Commercial Business · Microsoft, 2026-10-08
L5Microsoft Appoints Althoff as New CEO for Commercial Business · Redmond Channel Partner, 2025-10-01
L6Microsoft gains as Stifel turns bullish after lagging 2026 performance · Crypto Briefing, 2026-09-23
L7Microsoft Stock Surge: Analyst Highlights Expanding Cloud Footprint and OpenAI Momentum · Longbridge, 2026-07-31

Bull vs. bear: two bets on the same stock

1
A share is a small slice of the company. Its value comes from the profits the company will make in the future.
2
Nobody knows those profits yet. Buyers (bulls) pay today's price betting they'll beat what most people expect. Sellers (bears) bet they'll fall short.
3
When results come in, the price moves toward whichever side was right, and that side makes money.

The question they disagree on

Can Azure keep growing at least 40% through fiscal 2027 while Microsoft spends over $50B a quarter on data centers, without operating margin falling more than 1 percentage point?^{30,32,33,36,37,38,2}

Bull case: why buyers buy

Azure keeps growing over 40% as the new data centers fill with paying customers, so free cash flow recovers and margins barely move.

Azure is still speeding up. Growth reached 48%, and management guides 49% to 50% for the December quarter.
Demand still exceeds supply. CFO Amy Hood said so again, and some outside capacity deliveries slipped into the second half.
Office keeps growing and profit follows. Microsoft 365 commercial cloud revenue rose 17%, and operating income rose 21% to $45.9B.
Spending came in lower than feared. Capex was $45.2B including leases, against analyst estimates of about $51B.

Bear case: why sellers sell

If Azure slows or OpenAI pulls back, roughly $170B of 2026 data center spending earns too little and free cash flow keeps falling.

The build is eating cash. Free cash flow fell 27% to $18.6B even though cash from operations rose 29%.
Spending keeps climbing. Microsoft expects over $50B in the December quarter and about $170B for calendar 2026.
The consumer side is shrinking. Windows OEM and devices revenue fell 22%, and management expects a drop in the mid-30s percent next quarter.
AI data centers cost more to run. Microsoft Cloud gross margin fell to 66% and is guided to about 65% next quarter.

Where Delphi landsholdWe think today's price already weighs both sides fairly.See why

What to watch

The numbers that will settle the debate.

Azure revenue growth▲ improving

Up 48% last quarter, from 42% in the June quarter on the same dollar basis.^30,32,33,36

Shows whether new data centers turn into sales. Microsoft guides 49% to 50% for the December quarter.

Free cash flow▼ worsening

$18.6B last quarter, down 27% from a year earlier.^33,36,37

Shows whether AI sales are catching up with spending on data centers and chips.

Office and Windows revenue■ unclear

Microsoft 365 commercial cloud grew 17% last quarter, while Windows OEM and devices fell 22% and Xbox content and services fell 2%.^30,31,37

Office-type subscriptions help fund the build, while Windows and Xbox are shrinking.

Next earnings report

Jan 27

In 83 days

Earnings calls page ↗

Expected earnings per share: $4.87
Expected revenue: $96.57B

What to listen for: Azure growth against the 49% to 50% guide, and whether free cash flow steadies as quarterly spending tops $50B.^22,36,37

What would prove this wrong

✕Azure growth falls below 35% while quarterly data-center spending keeps rising.
✕OpenAI moves its committed computing to other clouds or cannot pay for it.
✕Usage-billed Copilot agents fail to raise Microsoft 365 revenue per user.
✕New bookings keep falling and the signed backlog starts to shrink.

Our ratingHoldas of Nov 3 close, $520.99 · what ratings mean

Azure growth is accelerating, but the stock already trades at about 26 times expected earnings, so its expected return beats the S&P 500 by less than our Buy bar.

12-month target: $662.22 (+27.1%)
Plus dividend: +0.7%
S&P 500, same method, with dividends: +18.5%
Expected vs the market: +9.3 points

The math behind the recommendation

Three 12-month price scenarios, weighted by probability, compared with the S&P 500 under the same method.

Now $520.99

Target $662.22

bull case30% likely

$766.02 +47%

Azure keeps growing over 40%, the new data centers fill with paying customers and free cash flow rises again, lifting earnings to the top of analyst forecasts.

$26.18 earnings per share × 29.3 = $766.02

base case50% likely

$658.96 +26%

Azure grows about 40% and operating margin falls less than 1 point, so earnings match the analyst average.

$25.12 earnings per share × 26.2 = $658.96

bear case20% likely

$514.68 -1%

Azure slows toward 35% or OpenAI cuts its commitments, operating margin falls more than 1 point, and earnings land near the lowest forecasts.

$24.24 earnings per share × 21.2 = $514.68

Why these odds: Fiscal 2028 earnings forecasts rose about 5% in 90 days and Microsoft beat again. It guided Azure to 49% to 50%, well above the 45% expected. Offsetting this, free cash flow fell 27% and bookings fell 12%.

How the prices are built: Wall Street expects earnings per share of $25.12 for the year starting a year from now (analysts range from $23.36 to $27.23). Today the stock trades at 25.1 times next year's earnings per share; its five-year middle is 30.16. Because earnings per share is forecast to grow fast, valuations are cut 1%, since fast growth rarely keeps its price.^{22,24,25,36,39}

What tests the call: Fiscal Q2 2027 results, with Azure growth measured against the 49% to 50% guidance (Jan 26)

Buy means expected to beat the S&P 500 by 10+ points over 12 months; Sell means expected to trail it by 10+. Inputs gathered Oct 29; the recommendation updates with the price every day. Model-generated, not personalized investment advice. How ratings work · Track record

What the price assumes

At $520.99, investors pay 35% more than they pay for the average stock's earnings

Microsoft trades at 25 times the earnings analysts expect over the next 12 months. That ratio is the multiple: what investors pay today for each dollar of a year's earnings. That is cheaper than it has been 80% of the time over the past five years, when the middle was 30.

Analysts expect earnings to grow about 21% the year after, against about 16% for the S&P 500. The S&P 500 trades at 19 times. The premium is a bet that Microsoft's earnings keep growing faster than the market's for years, not just next year.

Microsoft multiple: 25×
S&P 500 multiple: 19×
Base case: +26%
Bear case: −1%

The skewOur bear case loses about 5¢ for every $1 our base case makes. That ratio, how much you stand to lose against how much you stand to make, is the skew.

Last earnings

Fiscal Q1 2027 (July to September) results, reported Oct 28

Azure grew 48% and next quarter's guide is 49% to 50%, but free cash flow fell 27% and new bookings fell 12%.^{30,31,32,33,34,35,36,37,38,39}

Reported Oct 28	Expected	Actual	Difference
Earnings per share	$4.72	$4.89	+3.6%
Revenue	$90.62B	$92.28B	+1.8%

Stock reaction: -0.2% next day (Oct 29), after rising about 4% in after-hours trading

Why the stock moved

Up: Azure grew 48%, about 3 points above analyst estimates, and the 49% to 50% guide beat a 45% consensus.
Up: capex of $45.2B including leases came in below the analyst estimate of about $51B.
Down: free cash flow fell 27% and bookings fell 12%, which management ties to big Azure deals a year earlier.
Faded: the stock opened at $540.22 and closed at $530.14. Reports gave no reason; Alphabet fell about 12% that day.

What it means for the stock: Strengthened on growth, weakened on cash. Faster Azure and a higher guide support the bull case, but falling free cash flow and bookings keep the payoff of the build unproven.