Microsoft’s Recent Stock Performance and Future Outlook
Microsoft (MSFT) reached an all-time high of $543.45 on October 13, and it has been hovering around $530 as of now, which is about 2% below that peak. The company is set to announce its fiscal first quarter 2027 results, covering the period ending September 30, 2026, after market close on Wednesday, October 28.
Much of the recent stock increase can be attributed to Microsoft’s solid fiscal 2026 performance, where adjusted earnings per share rose by 22% compared to the previous year.
However, at its current valuation, Microsoft shares are priced at roughly 31 times those earnings. This seems steep, especially considering that the company’s own projections indicate slower growth ahead, even as its capital expenditures continue to rise.
I would be inclined to buy shares if they were priced around $465, which is about 12% below the current trading price.
A Strong Year, Already Paid For
Microsoft had an impressive fiscal 2026, with revenue increasing by 18% to $331.8 billion and operating income rising by 21% to $155.2 billion. The non-GAAP earnings per share, excluding the impacts of its investments in OpenAI, increased by 22% to $17.28. This strong performance was consistent throughout the year, with adjusted earnings per share growing by 23% year over year in both the first and last quarters.
Still, much of this growth seems to be reflected in the stock price. With shares trading around $530, Microsoft has a price-to-earnings ratio of about 31 based on the adjusted earnings from fiscal 2026. If using the reported earnings of $17.95 per share, the ratio would be around 30.
In comparison, the price-to-earnings ratio for the S&P 500 stands at about 26, which provides a justification for the premium charged when earnings are increasing at 22% annually.
Growth is Cooling as Spending Climbs
Management’s forecast for the September quarter indicates a slight cooling of growth. Microsoft anticipates revenue between $89.85 billion and $90.95 billion, with the cost of revenue estimated at around $29.6 billion to $29.8 billion, and operating expenses projected to be between $16.8 billion and $16.9 billion. At these levels, operating income is expected to grow about 14% to 17% compared to last year’s $38.0 billion. This is a drop from the year-over-year growth rates of 24%, 21%, 20%, and 18% seen across the quarters of fiscal 2026.
In essence, the pace of operating income growth has decelerated each quarter, and the guidance suggests that this trend will continue.
Spending is a significant factor in my desire for a more attractive buy price. Although cash from operations surged by 34% in fiscal 2026 to approximately $183 billion, Microsoft also invested close to $116 billion in new property and equipment, leading to a decline in free cash flow of about 6%, bringing it down to around $67 billion.
Additionally, the company expects capital expenditures to reach about $175 billion in calendar 2026.
As CFO Amy Hood noted during the earnings call in July, “We expect to remain free cash flow positive in FY27.” This seems like a relatively low expectation since Microsoft generated around $67 billion in free cash flow last fiscal year.
Why $465?
My buy price calculation starts with the adjusted earnings per share of $17.28 from the last fiscal year. I would target a price-to-earnings multiple of about 27 on that figure, leading to an estimated share price of roughly $465.
At that level, the price-to-earnings ratio based on reported earnings would align to about 26, which is comparable to that of the S&P 500. I believe it’s reasonable to pay around the market’s average valuation for a company whose earnings growth appears to be moving toward the mid-teens, particularly with increased spending.
Last time shares traded below $465 was July 31, shortly after the fiscal fourth-quarter results led to a significant stock price increase.
The upcoming report on October 28 could influence my price target in two main ways. Firstly, as my target relates to trailing adjusted earnings per share, any strong quarterly performance would elevate that target.
Management’s forecast suggests that operating income growth would be slightly over 15% at the midpoint. If adjusted earnings per share increased by 15% from the previous year’s $4.13, trailing adjusted earnings per share would be around $17.90, pushing my buy price to about $483.
The second factor is Azure, Microsoft’s cloud services platform. Earlier this month, I mentioned that I perceive the stock’s performance depends on Azure’s growth remaining above 40%. If that falls short, or if free cash flow continues to decline, I would prefer a lower price-to-earnings ratio than 27, thus decreasing my buy target.
As for whether I would purchase Microsoft stock before October 28? Well, not at approximately $530.
A strong report could certainly raise my buy price, and it’s possible the shares may not dip down to $465. But given the current price of around 31 times adjusted earnings, I feel like the stock has already baked in a lot of positive news. I would rather look to buy closer to $465.
