Microsoft Corporation

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Microsoft Corporation stock analysis MSFT overview
Bullish +75

History Says Now Is the Time to Load Up on Microsoft Stock

📉 Microsoft stock recently dropped about 10% following its earnings report, trading roughly 20% below its all-time high.

💹 Analyst Keithen Drury argues the current price represents a buying opportunity as the stock is at its cheapest level in three years.

🧮 Using forward earnings and operating profits ratios, Microsoft trades at lower multiples than its historical peaks of 35x and 30x respectively.

🚀 Revenue for fiscal Q2 (ended Dec. 31) rose 17% year-over-year to $81.3 billion, beating the provided guidance range of $79.5B-$80.6B.

☁️ Azure revenue surged 39% year-over-year, indicating strong continued AI spending and capacity utilization despite some internal allocation.

💻 Two core segments—productivity/business processes and intelligent cloud—outperformed guidance, while personal computing underperformed but is considered smaller.

📈 The author notes that Microsoft has seen four sell-offs exceeding 20% since 2020, all of which historically proved to be excellent investment times.

⚖️ Some valuation metrics show a potential for nearly 50% upside if the stock reverts to its higher historical trading levels.

🤝 Microsoft continues to invest heavily in AI via OpenAI, which impacts EPS but is accounted for in operating profits analysis.

📰 The article concludes with a plug for Motley Fool Stock Advisor's current top 10 list, noting Microsoft was not included among their recommended stocks.

⚠️ Keithen Drury and The Motley Fool both disclose that they hold positions in and recommend Microsoft stock.

🗓️ Revenue guidance was set during the Q1 earnings call for the fiscal year ending Dec. 31.

🧭 Internal AI computing capacity investments during Q1 and Q2 may have slightly tempered Azure's growth rate compared to a fully externalized scenario.

Bullish Signals
  • Microsoft stock has reached levels rarely seen in recent years, offering a potential buying opportunity after a 10% sell-off that leaves it about 20% below its all-time high.
  • The company is trading at the cheapest valuation over the past three years using forward earnings, and remains undervalued even when adjusted for OpenAI investments using the price-to-operating profits ratio.
  • Companywide revenue grew 17% year-over-year to $81.3 billion in the second quarter of fiscal 2026, beating the management guidance range of $79.5 billion to $80.6 billion.
  • Two out of three segments outperformed guidance, with productivity and business processes and intelligent cloud exceeding expectations.
  • Microsoft's most important segment, Azure, delivered incredible results with revenue rising 39% year-over-year, driven by strong AI spending.
  • Management noted that Azure growth could have been higher if internal computing capacity had not been allocated to internal capabilities, indicating even stronger underlying demand.
  • Historical analysis shows Microsoft's stock has sold off more than 20% four times since 2020, and each occasion proved to be an excellent time to invest for future gains.
Risk Factors
  • The stock recently faced a harsh 10% sell-off following earnings reports, placing it about 20% off its all-time high.
  • Microsoft's stock trades at three-year lows in multiple valuation metrics, which some may interpret as a warning sign for future performance.
  • More personal computing segment underperformed guidance, indicating potential weakness in one of Microsoft's key divisions.
  • Azure revenue growth rate could have been higher if the company hadn't diverted internal computing capacity to its own AI capabilities during Q1 and Q2.
  • The Motley Fool Stock Advisor recently identified 10 best stocks for investors to buy now, and notably did not include Microsoft on that list.
  • Microsoft's large investment in OpenAI skews traditional earnings per share (EPS) metrics, complicating valuation assessments.
Full Analysis
Microsoft (NASDAQ: MSFT) stock recently experienced a significant sell-off, dropping approximately 10% following its earnings report and falling about 20% below its all-time high. Despite this decline, the article argues that the company's business fundamentals continue to outperform expectations, noting that companywide revenue increased 17% year over year to $81.3 billion in the second quarter of Microsoft's fiscal 2026, which ended on December 31. Management had previously provided a revenue guidance range of $79.5 billion to $80.6 billion for the same period, and two out of three major segments exceeded expectations: productivity and business processes, along with intelligent cloud. The most critical segment, Azure, delivered exceptional results with revenue rising 39% year over year, demonstrating sustained momentum in artificial intelligence infrastructure spending, although capacity was partially redirected to internal needs. The article highlights that while the trailing price-to-earnings ratio is less useful for a growing company like Microsoft, forward earnings metrics indicate the stock is trading at its cheapest valuation levels in three years. Historically, when Microsoft traded at peak valuations around 35 times forward earnings or 30 times operating profits, the stock currently trades at roughly half those multiples. Using a price-to-operating profits ratio to account for significant OpenAI investments, the article maintains that the stock remains among its most affordable levels in three years. Furthermore, historical data shows that since 2020, Microsoft has sold off more than 20% four times, with each instance proving to be an excellent buying opportunity that led to substantial stock gains in a relatively short timeframe. Keithen Drury, the author of the analysis, has taken a personal position in Microsoft following this recent decline, viewing it as one of the best buying opportunities in years despite the Motley Fool's Stock Advisor team identifying ten other preferred stocks for the current market. The text notes that Netflix was featured on the Stock Advisor list in December 2004 and Nvidia in April 2005, which resulted in hypothetical returns of $431,111 and $1,105,521 respectively on a $1,000 investment by February 2026, citing the program's total average return of 906% against an S&P 500 return of 195%. While acknowledging these alternative recommendations, the core argument for Microsoft focuses on the lack of visible red flags in its business operations and the potential for significant upside if valuations normalize to historical averages while profits remain steady.