Microsoft sells the software most businesses run on and rents the second-largest cloud in the world, Azure, which just passed $100 billion of annual revenue growing 43%. It also owns about 27% of OpenAI. The question is what all the AI spending, about $257 billion this fiscal year, will earn.
Today’s close against the report’s numbers, updated every weekday. The analysis is as of October 22, 2026; the rating as of October 22, 2026. Both change only when the report is revised.
The cash-flow model’s bear-to-bull range, the probability-weighted value, the price, its 52-week range and the analysts’ average target. The copper line marks the base case; the fine dotted line is today’s close.
Written on October 22, 2026, ahead of its first-quarter fiscal 2027 results. Figures are from the company’s filings and releases unless noted. Not investment advice. The author holds no MSFT shares directly.
Microsoft reports three segments. Productivity and Business Processes (42% of last quarter’s revenue) is Microsoft 365, LinkedIn and Dynamics. Intelligent Cloud (44%) is Azure, server software and GitHub. More Personal Computing (14%) is Windows, Xbox, Surface and search advertising.
AI runs through all three: Copilot is sold inside Microsoft 365 (more than 30 million paid seats), and Azure rents computing to companies building AI, including OpenAI, in which Microsoft holds about 27% after OpenAI’s 2025 restructuring.
In the quarter to June, revenue rose 18% to $90.0 billion and operating income 18% to $40.6 billion. Intelligent Cloud grew 32%, Productivity 14% and More Personal Computing fell 4%. Earnings of $4.81 a share included a $3.2 billion gain on Microsoft’s stake in Anthropic. For the full fiscal year revenue was $331.8 billion and operating income $155.2 billion.
Contracted backlog rose 84% to $678 billion, though only about 25% excluding OpenAI, so one customer drives most of it. Microsoft guided first-quarter Azure growth to about 45% and fiscal 2027 capital spending to $255–260 billion including finance leases, up from about $190 billion. The shares fell about 28% in the first half of 2026 and then rose 39% in the third quarter, the best quarter since 1991.
| FY2022 | FY2023 | FY2024 | FY2025 | FY2026 | |
|---|---|---|---|---|---|
| Revenue | $198.3B | $211.9B | $245.1B | $281.7B | $331.8B |
| Operating margin | 42.1% | 41.8% | 44.6% | 45.6% | 46.8% |
| Net income | $72.7B | $72.4B | $88.1B | $101.8B | $133.7B |
| Operating cash flow | $89.0B | $87.6B | $118.5B | $136.2B | $182.9B |
| Capital spending | $23.9B | $28.1B | $44.5B | $64.6B | $115.9B |
| Free cash flow | $65.1B | $59.5B | $74.1B | $71.6B | $67.0B |
Revenue grew 57% between fiscal 2023 and 2026 and net income 85%, while capital spending (excluding finance leases) went from $28 billion to $116 billion. Free cash flow still rose, to about $67 billion, but it is now growing far more slowly than profit. Fiscal 2026 net income includes gains on the OpenAI and Anthropic stakes.
At the end of June Microsoft had $76.8 billion of cash and investments against $40.3 billion of debt. It owns about 27% of OpenAI on an as-converted basis, accounted for under the equity method, and has funded almost all of a $13 billion commitment. This model adds the stake at 27% of this site’s own OpenAI base-case value of $790 billion, about $213 billion (an estimate; OpenAI is private). It returned $10.2 billion through dividends and buybacks last quarter.
| Assumption | Base case | Basis |
|---|---|---|
| Revenue, fiscal 2026 | $331.8B | Reported |
| Growth, fiscal 2027 and 2028 | 17%, then 15% | Azure near 40%, the rest slower; fades to 3% by year 10 |
| Operating margin | 45% | Fiscal 2026 was 46.8%; AI depreciation rises |
| Net investment, fiscal 2027–2030 | $180B, $140B, $100B, $70B | Capex less depreciation as the build-out peaks; then $1 per $2 of new revenue |
| Discount rate | 10.0% | Beta 1.09, almost no net debt |
| Terminal growth | 3.0% | With a 25% return on new capital |
| Bear | Base | Bull | |
|---|---|---|---|
| Growth, FY2027 / FY2028 | 12% / 10% | 17% / 15% | 21% / 18% |
| Long-run operating margin | 40% | 45% | 48% |
| Net investment, first year | $200B | $180B | $160B |
| Discount rate | 11.0% | 10.0% | 9.0% |
| Value per share | $220 | $377 | $559 |
| Probability | 25% | 50% | 25% |
Weighted 25/50/25: $383. The OpenAI stake is worth about $29 a share of that; without it the base case is about $348.
| Discount rate | 8.5% | 9.0% | 9.5% | 10.0% | 10.5% |
|---|---|---|---|---|---|
| Value per share | $486 | $443 | $407 | $376 | $350 |
Every figure in this valuation comes from one model script, rerun and checked against this page each time the site is built. The XLSX model rebuilds it in live formulas: change any blue input and every year’s cash flow, the bridge to the value, the scenarios and the sensitivity table recalculate.
| To justify the price, you need | Against |
|---|---|
| Revenue growth of about 23% a year in fiscal 2027 and 2028, then the same fade | 17% and 15% |
| Or a long-run operating margin far above anything Microsoft has earned | 45% |
| Or a discount rate near 8.7% | 10.0% |
The price asks for growth well above the company’s recent 15–18%, or a quicker payback on the AI build-out than the model assumes. Analysts’ average target is about $559.
| Risk | Why it matters |
|---|---|
| Capital spending | About $257 billion this fiscal year; if AI demand slows, the depreciation stays. |
| OpenAI concentration | Most of the backlog growth comes from one customer, which is also diversifying to other clouds. |
| Copilot pricing | Seats are growing, but it is not yet clear how much extra revenue per user AI adds. |
| Competition | Amazon and Google are adding cloud capacity just as fast; Google Cloud grew 82% last quarter. |
Upside: Azure growth staying above 40%, Copilot pricing moving to per-seat plus usage, and OpenAI’s value rising toward its latest private marks.
Azure is growing above 40% and Copilot has more than 30 million paid seats, but capital spending of about $257 billion this fiscal year means free cash flow is growing far more slowly than profit. The OpenAI stake adds about $29 a share at this site’s own OpenAI value.
What would change the value: Azure growth against the 45% guided for the first quarter, the payback on the capex, and OpenAI’s share of the backlog are the next inputs.
Ranges, not three cases. The expected value is the average of 4,000 runs of this report’s own model, with every input drawn from a range: the base case is the middle, and the bear and bull cases are the 10th and 90th percentiles. Business inputs move together; the discount rate moves on its own. The 25/50/25 weighting in the valuation section gives $383. How the ranges work
Two different questions. The rating is relative: it asks whether the stock is cheaper or dearer than the S&P 500 on the same assumptions. The absolute view asks whether it is worth its price at all: on its own the stock trades above our estimated value, which is 28% below the price.
On the same assumptions every report uses (a 5.15% Treasury yield and a 4.5% equity premium), the S&P 500 itself is worth about 68% of its price. The rating compares each stock with that: Buy if it is at least 15% cheaper than the market on this basis, Sell if at least 15% dearer, Hold in between. It is the same rule for every company, whoever owns it. The rating depends on that assumption: it would be Buy if the index grows 6% a year and Hold at 10%, against 8% here. How ratings work
Against the Street: Analysts average about $559, a little above the price. The model’s lower value comes mostly from the net investment of $180 billion in fiscal 2027 and a 10% discount rate; at 8.5% it reaches $486.
| Measure | Microsoft | Industry median | Rank | |
|---|---|---|---|---|
| Revenue growth, last fiscal year | 17.8% | 21.3% | 5 of 7 | Worse than the median |
| Operating margin | 46.8% | 8.7% | 1 of 7 | Better than the median |
| Price to earnings | 29.4× | 58.0× | 2 of 7 | Better than the median |
| Free cash flow yield | 1.7% | 2.9% | 6 of 7 | Worse than the median |
Peers: the 6 other S&P 500 companies in Systems Software with complete data (CRWD, FTNT, GEN, NOW, PANW, TWLO). Last twelve months where reported, from SEC filings; prices from the latest close. A lower price-to-earnings ratio ranks higher. These figures update with each data run; the rating does not.
Azure and Copilot are working; the capex bill decides the return.
| What | Figures | Source |
|---|---|---|
| Latest results | $90.0B (Revenue, Q4 FY2026, +18%), $40.6B (Operating income, +18%), +43% (Azure growth), $678B (Commercial backlog, +84%) and others | Q4 FY2026 results; Capex guidance; Share price and targets |
| The numbers (five-year table) | Five years of annual figures and the last twelve months | SEC XBRL company facts; latest: 10-K for the period to 2026-06-30, 10-Q for the period to 2026-03-31 |
| Price at writing | $521.08 (Close, Oct 22, 2026) | Yahoo Finance; the time of the quote is stated beside the price |
| Discount rate inputs | 10-year Treasury 5.15%, equity risk premium 4.5% | Fixed for every report so they can be compared; How ratings work |
| Valuation | Every value, case and sensitivity | This site’s model: XLSX, CSV |
| Checked by hand | 12 figures on October 23, 2026 | All match. Audit log |
| Input | Bear (10th percentile) | Base (median) | Bull (90th percentile) |
|---|---|---|---|
| Growth, first forecast year | 12.0% | 17.0% | 21.0% |
| Growth, second forecast year | 10.0% | 15.0% | 18.0% |
| Operating margin, near term | 42.0% | 45.0% | 47.0% |
| Operating margin, long run | 40.0% | 45.0% | 48.0% |
| Net investment, first years ($B) | 200/170/130/90 | 180/140/100/70 | 160/110/70/40 |
| Discount rate | 11.0% | 10.0% | 9.0% |
| Simulation result | |
|---|---|
| Expected value (average of 4,000 runs) | $373.46 |
| Likely range, 10th to 90th percentile | $265.12 to $487.83 |
| Median | $369.55 |
| Chance the value is above the price | 5% |
| Chance it is cheaper than the S&P 500 | 58% |
Each input is drawn from a split normal: its bear and bull values are the 10th and 90th percentiles, so the two sides can differ. Business inputs share a common factor (correlation 0.6); the discount rate moves on its own. Inputs not listed are held at their base value. How the simulation works.