Microsoft's Strong Growth in AI Business
Written by Emily J. Thompson, Senior Investment Analyst
Updated: 2 hours ago
0mins
Should l Buy MSFT?
Source: Fool
- Cloud Growth: Microsoft's Azure cloud platform achieved a 39% revenue increase in Q2, with its Foundry platform seeing an 80% rise in customer spending, reflecting strong demand for AI services, although limited compute capacity constrained even higher growth potential.
- Capital Expenditure Plans: Microsoft spent $37.5 billion on capital expenditures last quarter, primarily for building data centers and server setups; while a slight drop in spending is expected this quarter, management remains confident in future plans, supported by a $625 billion backlog of remaining performance obligations.
- Software Business Performance: Microsoft 365 commercial revenue rose 17%, and Dynamics 365 increased by 19%, with Copilot software reaching 15 million users, indicating significant revenue growth potential for AI-driven product suites, especially with a market of over 400 million users.
- Attractive Stock Valuation: With Microsoft shares trading around $400 and a forward P/E ratio of 24, considering its competitive positioning in cloud computing and enterprise software, the company is set for double-digit revenue and earnings growth, making the current price a “no-brainer buy” for investors.
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Analyst Views on MSFT
Wall Street analysts forecast MSFT stock price to rise
34 Analyst Rating
32 Buy
2 Hold
0 Sell
Strong Buy
Current: 401.860
Low
500.00
Averages
631.36
High
678.00
Current: 401.860
Low
500.00
Averages
631.36
High
678.00
About MSFT
Microsoft Corporation is a technology company that develops and supports software, services, devices, and solutions. Its Productivity and Business Processes segment consists of products and services in its portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. It comprises Microsoft 365 Commercial products and cloud services; Microsoft 365 Consumer products and cloud services; LinkedIn, and Dynamics products and cloud services. The Intelligent Cloud segment consists of its public, private, and hybrid server products and cloud services. It comprises server products and cloud services, including Azure, and enterprise and partner services, including Enterprise Support Services. Its More Personal Computing segment primarily comprises Windows and Devices, including Windows OEM licensing; Gaming, including Xbox hardware and Xbox content; Search and news advertising, comprising Bing and Copilot, Microsoft News, and Microsoft Edge.
About the author

Emily J. Thompson
Emily J. Thompson, a Chartered Financial Analyst (CFA) with 12 years in investment research, graduated with honors from the Wharton School. Specializing in industrial and technology stocks, she provides in-depth analysis for Intellectia’s earnings and market brief reports.
- Significant Cloud Growth: Microsoft's Azure cloud platform experienced an 80% increase in customer spending in Q2, driving overall revenue growth of 39%, highlighting its strong demand and competitive position in AI services.
- Capital Expenditure Plans: Microsoft spent $37.5 billion last quarter on data center construction, and although a slight drop in spending is expected this quarter, management remains confident in future spending plans, supported by a backlog of $625 billion in remaining performance obligations.
- Strong Software Performance: Microsoft 365 commercial revenue rose 17%, while Dynamics 365 increased by 19%, with Copilot software reaching 15 million users, indicating ongoing expansion potential in the enterprise software market.
- Attractive Stock Valuation: With shares trading around $400 and a forward P/E ratio of 24, Microsoft's competitive positioning in cloud computing and enterprise software suggests double-digit revenue and earnings growth ahead, making it appealing for long-term investors.
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- Surge in Copilot Subscriptions: In Q2 of fiscal 2026, paid Microsoft 365 Copilot seats increased by over 160% year-over-year to approximately 15 million, indicating strong enterprise demand for AI assistants and driving revenue growth for the company.
- Accelerated Enterprise Deployments: The number of organizations deploying more than 35,000 Microsoft 365 Copilot seats tripled year-over-year in the same quarter, reflecting a significant increase in enterprise acceptance of AI solutions, thereby enhancing Microsoft's competitive position in the market.
- Launch of New Subscription Tier: Microsoft plans to introduce a new Microsoft 365 E7 subscription tier in May 2026, priced at about $99 per user per month, approximately 65% higher than its current top-tier enterprise plan, which will potentially increase the company's revenue streams.
- Strong Performance of Fabric Platform: Microsoft's unified data and analytics platform, Fabric, surpassed a $2 billion annual revenue run rate in Q2, with over 31,000 customers and a 60% year-over-year revenue increase, demonstrating its strong appeal in the enterprise software market.
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- AI Infrastructure Investment: At the GTC conference in San Jose, Nvidia anticipates over $600 billion in AI infrastructure spending by 2026, which is expected to drive vertical integration from chips to full AI systems, further solidifying its leadership in the AI market.
- Meta Layoff Plans: Meta is planning to cut 20% of its workforce to offset substantial AI infrastructure costs, aiming to achieve savings through increased use of AI agents and assistance for human workers, thereby enhancing operational efficiency and profitability.
- Tesla Semiconductor Manufacturing: CEO Elon Musk announced the imminent launch of Tesla's in-house semiconductor manufacturing, which is expected to boost production capacity and reduce reliance on external suppliers, enhancing the company's technological autonomy.
- Market Volatility Impact: The S&P 500 fell 1.6% last week due to turmoil from the Middle East conflict, but Goldman Sachs predicts a potential rebound to 7,600 points by the end of 2026 driven by rising corporate earnings, indicating the market's underlying recovery potential.
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- Massive Investment Trend: The four hyperscalers—Alphabet, Meta, Microsoft, and Amazon—are projected to collectively invest nearly $700 billion in AI data center build-outs by 2026, significantly enhancing their long-term growth potential and solidifying their market leadership.
- Accelerated Revenue Growth: Alphabet's Google Cloud achieved a 48% year-over-year growth in Q4, while Microsoft's Azure and Amazon's AWS have also seen revenue growth reaccelerate due to the integration of generative AI, demonstrating the direct impact of AI technology on business performance.
- Stock Buyback Surge: S&P 500 companies spent $249 billion on stock buybacks in Q3 2025, with estimates suggesting total buybacks surpassed $1 trillion for the first time in history, reflecting a focus on self-investment and a strategy to counteract high market valuations.
- Valuation Challenges: The S&P 500's Shiller P/E ratio is at its second-highest level historically, prompting companies to enhance earnings per share (EPS) through buybacks to attract value investors and mitigate dilution effects from stock-based compensation.
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- Intrinsic Value Assessment: According to GuruFocus's Discounted Earnings model, Microsoft's intrinsic value is estimated at $479.28, while its current trading price is $395.55, indicating a margin of safety of 17.47%, suggesting the company is modestly undervalued and may attract investor interest.
- Growth Stage Assumptions: In the growth stage, Microsoft's earnings per share (EPS) without non-recurring income is set at $15.34, with an expected growth rate of 20.50%, based on the average growth over the past 10 years, reflecting the company's strong growth potential over the next decade.
- Discount Rate Setting: GuruFocus employs an 11% discount rate, derived from a 4.25% yield on 10-year Treasury bonds plus a 6% risk premium, ensuring a reasonable assessment of future cash flows, which significantly impacts the intrinsic value calculation.
- Traditional Model Comparison: In contrast to the traditional DCF model based on free cash flow, Microsoft's intrinsic value calculated using this method is $219.68, indicating that the company is overvalued under this model with a margin of safety of -80.06%, prompting investors to exercise caution in their investment evaluations.
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- Layoff Announcement: Meta is planning to lay off over 20% of its workforce, affecting more than 15,000 employees, to address its staggering AI-related spending of up to $135 billion, indicating a pressing need for cost control.
- Capital Expenditure Increase: The company anticipates its AI-related capital expenditure will rise to between $115 billion and $135 billion in 2026, nearly doubling its spending from 2025, reflecting a significant commitment to AI infrastructure.
- Industry-Wide Trend: Major layoffs have also been announced by firms like Block and Amazon, with over 12,000 job cuts in the U.S. attributed to AI in 2026, highlighting the profound impact of AI on the job market.
- Investor Concerns: Despite Meta's increased investment in AI, analysts express concerns about sustainability, suggesting that the cuts may affect the company's growth and margins, particularly in the context of rising spending alongside workforce reductions.
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