Microsoft Corporation (NASDAQ:MSFT) reports quarterly results on Oct 28, and the stock ranks eighth in our list of the 10 stocks in Trump’s latest stock portfolio. Click to see the other nine. Trump bought Microsoft five times in August.
Bull Case
Bulls see Microsoft as the AI company with the most ways to get paid. Customers rent its Azure cloud to run AI, and they also buy AI tools built into the software they already use, like Copilot. Demand for Azure is higher than the computing power Microsoft can supply, and management said the new capacity it added in the June quarter was used almost right away. Azure growth reached 43% that quarter, and management expects it to speed up to about 45% in the current quarter. Growth in the backlog of signed cloud work came mostly from customers outside OpenAI, CFO Amy Hood said on the July earnings call. Big investors back the story. Ken Fisher’s Fisher Asset Management raised its Microsoft stake by 3% in the second quarter, and Microsoft ranks fourth in our list of his 10 best AI stocks. Click to see the other nine picks.
Bear Case
Bears point to the bill. Microsoft’s capital spending keeps rising, and Deutsche Bank analysts have warned that free cash flow could fall close to breakeven in fiscal 2027. About two-thirds of the spending goes to chips and other short-lived equipment, CFO Amy Hood said on the July earnings call. Chip and memory prices have also jumped. Some investors see a hedge. Wedgewood Partners thinks gains on Microsoft’s OpenAI stake could offset higher chip and memory costs from the buildout. Check the full letter here. OpenAI is also a concentration risk. It made up about 45% of Microsoft’s commercial backlog in the December quarter, so a slowdown at OpenAI would hit the backlog too. The software side faces a threat as well, because AI coding tools and rival assistants compete with Copilot and could pressure per-seat pricing. Hedge funds are trimming even a stock they love. Microsoft ranks second in our list of the 40 most popular stocks among hedge funds, and the number of hedge funds holding it fell from 282 to 273 in the second quarter, according to Insider Monkey’s database. Click to see the other 39.
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Valuation
Microsoft trades at 26.75 times forward earnings, a 27% premium to the sector median of 21.01. It is also 12% below its own five-year average of 30.47. On a GAAP basis the forward P/E is 26.83, below the sector median of 28.10. The premium comes with growth. Analysts expect earnings per share to grow about 20% and revenue about 18%. Pairing the P/E with that growth gives a PEG ratio of 1.70 against a sector median of 1.14, and it sits 25% below Microsoft’s own five-year average of 2.27. Investors pay more than for the average tech stock, and less than they usually pay for Microsoft.
The price assumes Azure keeps growing in the 40s and earnings keep growing near 20%. That looks reachable while Azure demand beats supply and management guides to 45%. The cushion is thin. If earnings growth fell to half the expected rate, about 10%, the same P/E would equal roughly 2.7 times growth, which is expensive. Many investors still ask whether the growth can cover the spending bill. Click to see whether the AI spending is finally paying off.
Should You Buy Ahead of Earnings?
A strong Azure number with steady spending would support the stock. A miss on Azure, or a higher spending forecast without matching growth, could hit the shares hard, and the stock has swung widely on this question this year. Long-term investors can own Microsoft Corporation at this valuation, and anyone who wants to buy before earnings should consider building a position in steps.
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