Microsoft’s cloud business crossed a line it had never crossed before: Azure passed $100 billion in annual revenue for fiscal 2026. In the fiscal fourth quarter alone, Azure and other cloud services grew 43% (unchanged in constant currency)
That’s the paradox. Microsoft (NASDAQ:MSFT) sells the software much of the working world runs on, including Microsoft 365, LinkedIn, and Dynamics 365, and rents out computing power through Azure. Customers pay subscriptions and usage fees, and the company is layering AI assistants called Copilot on top. So is the lower multiple a bargain on a business still growing fast, or a fair markdown for a company spending heavily to keep up? The answer depends on how much weight one engine carries, and how much of the headline came from one-time gains.
A Software Habit With a Cloud Engine Attached
Microsoft’s edge starts with where customers already are. The Productivity and Business Processes segment (Microsoft 365, LinkedIn, Dynamics 365) produced $37.8 billion of fiscal fourth-quarter revenue, up 14%. Microsoft 365 commercial cloud revenue rose 14%, or 16% when adjusted for a prior-year boost from in-period revenue recognition. LinkedIn grew 12%, and Dynamics 365 grew 13%.
That installed base gives Copilot somewhere to go. Microsoft said Microsoft 365 Copilot reached more than 30 million paid seats this fiscal year, with Azure supplying the computing behind it. Contracted demand backs it up: Commercial remaining performance obligation hit $678 billion, up 84%, with a weighted average duration of 2.3 years. Cloud spending doesn’t only help Microsoft; a handful of AI names ride a similar wave. See the list.
Where the Growth Is Showing Up
The fiscal fourth quarter put the engine on display. Revenue came in at $90.0 billion, up 18%, and fiscal 2026 revenue reached $331.8 billion, also up 18%. Intelligent Cloud revenue hit $39.3 billion, up 32%, led by Azure’s 43%. Microsoft Cloud revenue, the company’s own cloud measure, reached $59.3 billion, up 27%.
Profit kept pace. Operating income rose 18% in the quarter to $40.6 billion, and 21% for the full year to $155.2 billion. Adjusted EPS (non-GAAP, which strips out swings from Microsoft’s OpenAI investments) was $4.74 for the quarter, up 23%, and $17.28 for the year, up 22%. Where cloud and AI are concerned, the moat looks like it’s widening.
Is the Headline Quarter Flattering the Picture?
The sharpest objection starts with the quality of the quarter. Microsoft said several one-time items added $0.27 per share versus its own guidance, including a $3.2 billion gain on its Anthropic investment, partly offset by severance costs and Xbox impairment charges. Outside the cloud, More Personal Computing revenue fell 4% to $12.9 billion, with Windows OEM and Devices down 7% and Xbox content and services down 10%. Microsoft’s own risk disclosures also warn that its large cloud and AI investments may not earn their expected returns.
But Microsoft said that after adjusting for those items, it still beat its expectations on revenue, operating income and EPS. And the shrinking segment is the smallest of the three. The risk is real, but for now it looks contained. Prefer a peer that trades very differently? This cloud competitor tells another story on growth and price.
A Premium to Peers, a Discount to Its Own Past
Here’s where the paradox shows up in the numbers. At a forward P/E of 26.59, as of October 6, investors are paying about $26.59 for every $1 of expected earnings. The sector’s forward P/E is 23.81, so Microsoft carries a premium to its peers. But its own five-year average is 30.52, so the stock sits below its usual price tag.
Is the premium deserved? Analysts expect earnings per share to grow 19.77% in 2027, a touch below the 22% adjusted EPS growth for fiscal 2026 but still quick for a company this size. Revenue is growing 18%, and the backlog grew 84%. Is the discount to history deserved? That’s the harder call. With revenue and earnings both growing near 20%, the lower multiple looks like a price for caution about spending, not for slowing growth. If the spending pays off, the gap should have trouble surviving. Fund managers have been slightly less enthusiastic. A total of 273 hedge funds held the stock in the most recent quarter, down from 282 in the prior one. Short interest is 0.91% of the float, which points to relatively limited bearish positioning.
Priced for Caution, Not for a Slowdown
The evidence points to a business running at full tilt and a multiple priced for some skepticism. At 26.59 times expected earnings, investors pay more than the sector average but less than Microsoft’s own five-year norm, for earnings expected to grow 19.77% in 2027. The discount looks real, though it comes with the spending question attached.
The setup suits long-term investors who can sit through a heavy-spending cycle. Azure growth slipping from its 43% pace while spending keeps climbing would change that, as would Copilot adoption stalling after 30 million seats.
READ NEXT: Top 10 AI Stocks That Will Skyrocket and 2 Stocks Trump Bought in July Are Now Down 17% to 20%. Time to Buy?
