Microsoft MSFT released its fiscal third-quarter earnings report on April 29. Here’s Morningstar’s take on Microsoft’s earnings and stock.

Key Morningstar Metrics for Microsoft

  • Fair Value Estimate: $600.00
  • Morningstar Rating: ★★★★★
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Uncertainty Rating: Medium

What we thought of Microsoft’s fiscal Q3 earnings

Microsoft’s third-quarter results topped the high end of guidance. Revenue increased 15% year over year in constant currency to $82.9 billion, compared with the high end of guidance of $81.75 billion, while operating margin was 46.3%, compared with the high end of guidance at 46.1%.

Why it matters: Results continue to look good from a variety of facets, as headline numbers came in ahead of our aggressive expectations on both the top and bottom lines. All three segments beat the high end of guidance. Critically, we see strength in Azure, in both traditional and artificial intelligence workloads.

  • Near-term demand indicators remain robust. Commercial bookings grew 7% year over year in constant currency, excluding OpenAI, and declined 6%, including OpenAI. Remaining performance obligation was up 99% to $627 billion, about 25% of which will be recognized in the next 12 months.
  • Demand for Azure AI services is surging, which is a long-term positive. While Azure remains capacity-constrained, both traditional and AI workloads were strong. Azure growth was 39% in constant currency for the quarter and surpassed guidance of 37.5%, versus 84% growth in capital expenditure.

The bottom line: We keep our fair value estimate for wide-moat Microsoft at $600 per share as we raise our growth forecast along with an offsetting margin decrease based on more Azure capital expenditures. The stock remains one of our top picks.

Coming up: Fourth-quarter guidance is just shy of FactSet consensus estimates but in line with our model, and includes $87.40 billion in revenue, 44.1% operating margin, and $4.18 in EPS at the midpoints. The key takeaway is the new plan for $190 billion in capex over the next three quarters.

Big picture: We see results as consistent with our long-term thesis, which centers on the expansion of hybrid cloud environments, the proliferation of AI, and Azure. We center our growth estimates around Azure, Microsoft 365 E5 migration, and traction with the Power Platform.

Fair Value estimate for Microsoft

With its 5-star rating, we believe Microsoft’s stock is significantly undervalued compared with our long-term fair value estimate of $600. This implies a fiscal 2026 enterprise value/sales multiple of 14 times and an adjusted price/earnings multiple of 39 times. We model a 5-year compound annual growth rate for revenue of approximately 13%, including the Activision acquisition.

Economic Moat Rating

For Microsoft overall, we assign a wide economic moat, arising primarily from switching costs, with network effects and cost advantages as secondary moat sources. Based on the company’s segments, we believe the productivity and business processes and intelligent cloud segments have earned wide moats, and the more personal computing unit warrants a narrow moat. We believe Microsoft’s moat will probably allow the company to earn returns in excess of its cost of capital over the next 20 years. We rate Microsoft’s productivity and business processes segment, Intelligent Cloud segment and More Personal Computing segment as having a wide moat based on switching costs and network effects. We do not believe that either the Microsoft Surface or Microsoft’s Bing search engine enjoys a moat.

Financial strength

We believe Microsoft has excellent financial strength, arising from its strong balance sheet, growing revenue, and high and expanding margins. As of June 2025, Microsoft had $95 billion in cash and equivalents, offset by $43 billion in debt, resulting in a net cash position of $51 billion. Gross leverage is at 0.3 times fiscal 2025 EBITDA. Our base case assumes that revenue grows at a healthy pace, driven by Azure public cloud adoption, Office 365 upselling efforts, AI adoption, and broader digital transformation initiatives. We see strong margins improving further over the next several years. Free cash flow margin has averaged near 30% over the last three years, which we expect to generally improve over time.

Risk and Uncertainty

We assign Microsoft an Uncertainty Rating of Medium. The firm faces risks that vary among the products and segments. High market share in the client-server architecture over the last 30 years means significant high margin revenue is at risk, particularly in OS, Office, and Server. Microsoft has thus far been successful in growing revenues in a constantly evolving technology landscape, and it’s enjoying success in both moving existing workloads to the cloud for current customers and attracting new clients directly to Azure. AWS has taken the market by storm, with Azure trailing, but the two are seen as clear leaders. This is a rapidly evolving market and Microsoft must continually adjust its offerings, add solutions to the stack, and compete with a company that has built a business around aggressive pricing.

While we do not see significant ESG risks, we note Microsoft faces strong competition for software engineers on the hiring front, and it also faces risks arising from a potential data breach within its data centers.

MSFT bulls say

  • Public cloud is widely considered the future of enterprise computing, and Azure is a leading service that benefits the evolution first to hybrid environments, and then ultimately to public cloud environments.
  • Microsoft 365 continues to benefit from upselling into higher-priced stock-keeping units as customers are willing to pay up for better security and Teams Phone, which should continue over the next several years.
  • Microsoft has monopoly-like positions in various areas (OS, Office) that serve as cash cows to help drive Azure growth.

MSFT bears say

  • Momentum is slowing in the ongoing shift to subscriptions, particularly in Office, which is generally considered a mature product.
  • Microsoft lacks a meaningful mobile presence.
  • Microsoft is not the top player in its key sources of growth, notably Azure and Dynamics.