Microsoft MSFT is set to release its fiscal fourth-quarter 2026 earnings report on July 29. Here’s Morningstar’s take on what to look for in Microsoft’s earnings and the outlook for its stock.

Key Morningstar metrics for Microsoft

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

Microsoft earnings release date

  • Wednesday, July 29, after the close of trading

What to watch for in Microsoft’s fiscal Q4 earnings

  • Azure guidance: Azure has been surging but remains capacity-constrained. Guidance for this quarter calls for 39%-40% constant-currency growth, which is the single most important factor, in our view. We will look for commentary on the amount of Azure capacity used for internal purposes. Any information on Azure’s recovery point objective (the amount of data loss) would also be interesting.
  • AI: Microsoft is making a big bet on capital expenditures for artificial intelligence, which have grown faster than revenue. This raises concerns about how much the company can recoup on massive investments. We will also see if an increase in Claude Copilot seats (software licensing) can help drive AI adoption higher.
  • Margins: We believe margins should be fine, but with all the recent capex, depreciation could start to ramp more meaningfully, so this remains a key open question.
  • We think Microsoft’s shares are attractive, since it and other software stocks have lagged the broader market since July 2025.

The following are excerpts from Morningstar’s company report on Microsoft.

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. We believe revenue growth will be driven by Azure, Office 365, Dynamics 365, LinkedIn, and emerging AI adoption. Azure in particular is the single most critical revenue driver over the next 10 years, in our view, as hybrid environments (where Microsoft excels) drive mass cloud adoption. We believe More Personal Computing will grow modestly above GDP over the next 10 years.

We model a five-year compound annual growth rate for revenue of approximately 13% inclusive of the Activision acquisition. We also model operating margins increasing modestly from 45% in fiscal 2024 (actual) to 46% in fiscal 2029, driven by improvements in gross margin as Azure continues to scale, as well as some operating leverage. We expect some interim pressure on both gross margin and operating margin in fiscal 2025 from an accounting change, Activision pressure, and investment in Azure capacity.

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 (which include Azure, OpenAI, and more) have earned wide moats. The more personal computing unit (which encompasses Windows, Gaming, Devices, and Search) warrants a narrow moat.

We believe Microsoft’s moat will probably allow it to earn returns in excess of its cost of capital over the next 20 years. In our view, Azure represents the core of Microsoft at this point as one of the two public cloud leaders, and it builds upon the company’s overall software. We think its acquisition of Activision establishes a narrow moat for the gaming segment. We do not believe Microsoft Surface enjoys a moat of any kind, as it’s not competitive with other laptops, and the company has not enjoyed much success in non-core devices in recent years. Finally, we also do not believe there is a durable moat in Microsoft’s Bing search engine.

Financial strength

We believe Microsoft enjoys 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. 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. Although Microsoft has thus far been growing revenues in the technology landscape, it must continue to drive revenue growth for cloud-based products faster than declines for on-premises products. Microsoft has also had several high-profile acquisition flops, including Nokia, Quantive, and the Permira-led Informatica LBO. The GitHub and ZeniMax deals have shown signs of growth, while the Activision deal has been successful.

The public cloud buildout remains in its early phases. AWS has taken the market by storm, while Azure has trailed, though both are seen as clear leaders. While we do not see significant ESG risks, we note that Microsoft faces strong competition for software engineers on the hiring front and the risk of 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 and then ultimately 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.

This article was compiled by Irza Waraich.