‘Lagging’ Microsoft Stock (MSFT) Bulls Set Sights on $633 Price Target

Technology stocks continue to surge, with the sector hitting new highs and its most prominent players leading the market’s gains. Microsoft (MSFT), surprisingly, is up “only” 20% this year, compared to a 24% return for the Technology Select Sector SPDR Fund (XLK).

Despite this relative underperformance, I believe Microsoft is positioned to outperform from here, supported by strong fundamentals, accelerating cloud momentum, and rapid adoption of its AI ecosystem. At under $500 per share, MSFT looks compellingly valued given its impressive growth metrics and expanding leadership in cloud and AI.

With accelerating cloud revenue, expanding AI adoption, and a robust enterprise customer base, Microsoft remains one of the best-positioned tech giants for sustainable long-term growth. For these reasons, I remain stoutly Bullish on MSFT stock, viewing the current price of ~$500 as an attractive entry point for investors.

What’s Driving MSFT’s Reacceleration

If we have learned anything from tech stocks reporting this earnings season, it is that the AI flywheel is not to be underestimated. In its latest quarterly figures covering Q3 2025 (shown as Q1 2026 in the company’s filings), Microsoft reported a record $77.7 billion in revenue, up 18.4% year-over-year, as Azure and the broader cloud experienced explosive adoption. Azure and other cloud services grew 40%, as demand again exceeded supply, even after additional capacity was brought online.

In the meantime, the company’s remaining commercial performance obligation (backlog) jumped 51% to $392 billion, a significant setup for future periods. Windows OEM rose 6%, and search ads climbed 16%, adding breadth beyond the cloud. Notably, the 18.4% revenue growth marks the most substantial quarterly increase since March 2022, which is remarkable given the post-pandemic tailwinds at the time.

In addition to the headlines about “Copilot,” the factors driving Microsoft’s cloud growth are much more substantial. Management noted an acceleration in core infrastructure demand from the largest customers, and the Intelligent Cloud segment advanced 28% to $30.9 billion. The Microsoft Cloud umbrella reached $49.1 billion, up 26% year-over-year. So, you have an accelerating Azure, a record backlog, and a balanced contribution from productivity apps that are quietly getting more AI features and better unit economics.

Margins: An Incredible Expansion Story

When it comes to unit economics, Microsoft’s EBITDA margin soared to roughly 60% this quarter — the highest in the company’s public history. For a $3.8 trillion tech giant, expanding margins at this scale is nothing short of remarkable. This strength is driven by high-margin software businesses like Microsoft 365, Dynamics, and GitHub, a favorable shift in mix toward more efficient cloud services, and the growing adoption of AI-powered Copilot add-ons, which enable premium pricing layered on top of existing enterprise subscriptions.

Some investors may question the cost of Microsoft’s expanding AI infrastructure — and indeed, it is substantial. Cloud gross margin declined to 68% as the company ramped up AI-related infrastructure and usage, even while overall margins improved thanks to efficiency gains and a more potent product mix. Capital expenditures totaled $34.9 billion for the quarter, with approximately half directed toward GPUs and CPUs that power Azure’s AI capacity expansion. These significant investments are not only meeting current demand but are also laying the foundation for higher-margin software monetization in the years ahead.

Despite these massive outlays, Microsoft’s cash generation remains unmatched, producing about $25.7 billion in free cash flow for the quarter — a clear reminder that the company’s financial engine is as powerful as ever.

Durable Growth and Expanding AI Momentum Justify Valuation

Some might argue that Microsoft’s 31x multiple on this year’s expected EPS makes the stock look expensive — but I strongly disagree. Price is what you pay; growth durability is what you own. Current Street forecasts call for mid-teens revenue growth and high-teens EPS growth over the medium term as AI capacity scales into Azure workloads and Copilot adoption deepens. This combination makes today’s valuation quite reasonable, especially for a company boasting fortress-like margins, a $392 billion backlog, and rising returns on incremental capital.

To put this into perspective, if FY2026 EPS lands between $15.50 and $16.50, the stock would be trading at a PEG ratio in the low 2s, backed by accelerating revenue growth and near-record operating margins. Even if Azure’s 40% growth rate moderates into the mid-30s while Microsoft 365 continues to drive premium upsells, that earnings outlook appears conservative rather than optimistic — suggesting meaningful upside remains.

With all that considered, further acceleration now appears increasingly likely. Since the latest earnings report, Microsoft’s growth flywheel has continued to gain momentum. OpenAI signed a new agreement to purchase an additional $250 billion worth of Azure services, significantly strengthening long-term demand visibility.

At the same time, Microsoft secured a $9.7 billion, five-year partnership with IREN (IREN) to ensure access to Nvidia (NVDA) GB300 chips, adding roughly 200 MW of capacity at its Childress, Texas site and planning another 200 MW expansion with G42 in the UAE by 2026. Finally, the enterprise rollout of Copilot concluded in October, driving broader AI integration and usage across the Microsoft 365 ecosystem.

Is Microsoft a Buy, Sell, or Hold?

Wall Street remains extremely bullish on Microsoft despite the recent stumble from its highs. The stock now features a Strong Buy consensus rating, based on 34 unanimous Buy ratings over the past three months. In fact, MSFT’s average stock price target of $633.14 suggests ~25% upside over the next 12 months.

See more MSFT analyst ratings

Microsoft’s Growth Engine and AI Scale Opens Door to $633 Price Target

Microsoft’s current setup combines exceptional growth durability, expanding margins, and unmatched AI distribution. At under $500 per share, investors gain exposure to accelerating Azure growth, a $392 billion commercial backlog, and Copilot-driven upsells — all supported by strategic capital spending that lays the foundation for tomorrow’s high-margin software profits.

Against a backdrop of mid-teens revenue growth and high-teens EPS expansion, Microsoft’s valuation appears not just reasonable, but potentially undervalued. A laggard indeed. While execution risks or fluctuations in AI demand remain possible, the company’s scale, cash generation, and AI leadership give it a durable competitive edge. I remain decisively and structurally bullish on Microsoft and plan to continue adding to my existing position.