Full Breakdown
Microsoft Stock Valuation Ahead of Q1 FY27 Earnings
By Drooid · · How we work
Recent Financial Performance
Microsoft reported record quarterly revenue of $331.8 billion for fiscal 2026, an 18% year-over-year increase, and operating income rose 21% to $155.2 billion. Adjusted earnings per share (EPS) jumped 22% to $17.28, and cash from operations grew 34% to roughly $183 billion. The stock peaked at a record $543.45 in mid-October and has since settled near $530, trading at about 31 times fiscal-2026 adjusted EPS (?30 times reported EPS). The S&P 500’s price-to-earnings multiple is roughly 26, indicating a premium for Microsoft relative to the broader market.
Capital Spending and Free-Cash-Flow Outlook
Capital expenditures surged to nearly $116 billion in fiscal 2026, pushing free cash flow down about 6% to $67 billion. Management projects calendar-2026 capex of roughly $175 billion. Chief financial officer Amy Hood told analysts in July that the company expects to remain free-cash-flow positive in fiscal 2027, a modest bar given the prior year’s $67 billion free cash flow.
Analyst’s Valuation Model
The analyst at The Fool calculates a target price of $465 per share by applying a 27-times price-to-earnings multiple to the trailing adjusted EPS of $17.28. At that multiple, Microsoft would trade at about 26 times reported EPS, aligning with the S&P 500 average. By contrast, the current market price of roughly $530 implies a 31-times multiple on adjusted earnings, suggesting much of the recent earnings momentum is already priced in.
Risks and Considerations
Operating-income growth has decelerated each quarter of fiscal 2026, and guidance points to a further slowdown. The analyst stresses that Azure’s cloud growth must stay above 40% for the valuation to hold; a shortfall or continued free-cash-flow erosion would warrant a lower multiple and a reduced target price.
Outlook and Recommendation
Given the premium valuation and the uncertainty around Azure growth and capital spending, the analyst advises waiting for a price nearer $465 before buying. The upcoming earnings release later in October could adjust the target price upward if results exceed expectations, but the current price already reflects much of the positive news.
