Microsoft (MSFT) Stock Looks Undervalued to Wall Street – Is It a Buy?

TLDR

• Microsoft Q3 FY2026 revenue hit $82.9B, up 18% year over year
• Azure cloud grew 40%, with management guiding 39–40% growth next quarter
• AI business reached a $37B annual revenue run rate, up 123% YoY
• Paid Microsoft 365 Copilot seats grew from 15M to over 20M in one quarter
• Microsoft plans to spend ~$190B on capex in 2026, cloud gross margin expected to dip to ~64%

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Microsoft posted another strong quarter, but the real story is how much it’s spending to keep the momentum going.

Microsoft Corporation, MSFT

Fiscal Q3 2026 revenue came in at $82.9 billion, up 18% from a year ago. Operating income rose 20% to $38.4 billion, and net income climbed 23% to $31.8 billion. Microsoft Cloud revenue hit $54.5 billion, up 29%.

Azure grew 40% in the quarter — slightly ahead of the prior quarter — and management is guiding for 39–40% constant currency growth in Q4. Demand is still outpacing available capacity, which means Microsoft could potentially be growing even faster if the infrastructure was there.

Commercial remaining performance obligations hit $627 billion, nearly double from a year ago. That’s a massive forward revenue signal.

AI Revenue Is Already Meaningful

Microsoft’s AI business is now running at $37 billion annually, up 123% year over year. That’s not a rounding error.

Paid Microsoft 365 Copilot seats crossed 20 million, up from 15 million the prior quarter. Still a small slice of the total commercial base, but the direction is clear.

Microsoft has also diversified beyond OpenAI, adding models from Anthropic and others to Azure. That gives enterprise customers more options and reduces concentration risk for Microsoft itself.

The Spending Question

Here’s where it gets complicated. Microsoft expects to spend around $190 billion on capital investments in calendar 2026. That’s well above prior Wall Street estimates.

Data centers, chips, and networking don’t come cheap. All that infrastructure is needed to serve rising Azure and AI demand, but it also means higher depreciation costs down the road.

Cloud gross margin is expected to drop to around 64% next quarter, partly due to ongoing AI investment and higher Copilot usage.

The core question the market is sitting with: will new AI revenue scale fast enough to justify the spend? If utilization is strong, margins recover. If adoption softens, the numbers get harder to defend.

Other parts of the business are holding up. Microsoft 365 Commercial cloud revenue grew 19%, Dynamics 365 was up 22%, LinkedIn rose 12%, and search advertising (ex-TAC) grew 12%.

Gaming is the weak spot. Xbox content and services revenue fell 5%, and Microsoft announced further job cuts in the division. It’s not the focus of the bull case right now.

What Analysts Are Saying

Wall Street isn’t flinching. According to MarketBeat, Microsoft carries a Moderate Buy consensus from 48 analysts — 41 Buys, 7 Holds, zero Sells.

The average 12-month price target sits at $559.84, with a range from $400 to $870. That average implied roughly 45% upside from the price used in MarketBeat’s latest calculation.

Zero sell ratings across 48 analysts is a statement. The confidence in Azure’s growth runway and Microsoft’s ability to monetize AI across multiple product lines is keeping sentiment firmly positive.

Microsoft 365 Copilot seat growth and Azure’s Q4 guidance of 39–40% are the two numbers the market will be watching most closely going forward.