Today · Tech Breaking
Microsoft ( MSFT +0.66% ) closed at a record $543.45 on Oct. 13, and it hasn't moved far since. Shares trade near $530 as of this writing, about 2% off the high. Microsoft posts results for the fiscal first quarter of 2027 (the three months ended Sept. 30, 2026) after the market closes on Wednesday, Oct. 28.
The company has earned a good chunk of that climb. Microsoft's adjusted earnings per share jumped 22% for fiscal 2026, which ended June 30. But at today's price, shares cost about 31 times those earnings.
It's a steep price for a business whose own guidance suggests slower growth right as its capital spending keeps rising. I'd buy the stock at about $465 a share, roughly 12% under where it trades now. Image source: Getty Images.
A strong year, already paid for Microsoft's fiscal 2026 was impressive by nearly any measure. Revenue grew 18% to $331.8 billion, and operating income climbed 21% to $155.2 billion. Non-GAAP (adjusted) earnings per share, which strip out the effect of Microsoft's investments in OpenAI, increased 22% to $17.28.
And the pace held up all year, with adjusted earnings per share up 23% year over year in both the first and fourth quarters of fiscal 2026. But the stock price already reflects much of that. With shares around $530, Microsoft trades at about 31 times its fiscal 2026 adjusted earnings.
On reported earnings of $17.95 per share, it's about 30. The price-to-earnings ratio for the S&P 500 ( ^GSPC -0.52% ) on its reported earnings is about 26. The premium is easier to defend when earnings rise 22% a year.
Growth is cooling as spending climbs And management's forecast for the September quarter suggests growth is slowing, at least a little. Microsoft sees revenue between $89.85 billion and $90.95 billion, cost of revenue between $29.6 billion and $29.8 billion, and operating expenses between $16.8 billion and $16.9 billion. At these levels, operating income would climb around 14% to 17% from the year-ago quarter's $38.0 billion.
This compares to year-over-year growth of 24%, 21%, 20%, and 18% over the four quarters of fiscal 2026. In short, operating income growth has slowed every quarter for a year, and the guidance shows it slowing again. The spending is the bigger reason I want a discount.
Cash from operations grew a strong 34% in fiscal 2026, to about $183 billion. But Microsoft also spent almost $116 billion on additions to property and equipment, so free cash flow dipped about 6% to roughly $67 billion. What's more, management expects capital expenditures of about $175 billion in calendar 2026.
"[W]e expect to remain free cash flow positive in FY27," chief financial officer Amy Hood said on Microsoft's earnings call in July. It's arguably a low bar -- Microsoft produced around $67 billion in free cash flow last fiscal year. Why $465?
My buy price starts with the $17.28 Microsoft earned per share last fiscal year on an adjusted basis. I'd pay a price-to-earnings multiple of around 27 on that number, which comes out to about $465 a share. At that price, Microsoft's price-to-earnings ratio on reported earnings would be about 26, on par with the S&P 500 's.
I think paying around the market's valuation multiple is fair for a business whose earnings growth looks set to cool toward the mid-teens as its spending keeps climbing. Shares last closed under $465 on July 31, two days after the company's fiscal fourth-quarter report pushed the stock sharply higher. The Oct. 28 report might shift my price in two ways.
The first is earnings. Because my price is linked to trailing adjusted earnings per share, every strong quarter lifts it. MSFT Microsoft $524.51 +$3.43 (+0.66%) NASDAQ · As of 4:00 PM ET 10/23/26 Management's guidance suggests operating income growth of a bit over 15% at the midpoint.
If adjusted earnings per share gained 15% from the year-ago period's $4.13, trailing adjusted earnings per share would reach around $17.90, and my buy price would rise to about $483. The second is Azure, Microsoft's cloud computing platform. As I wrote earlier this month, I think the stock needs Azure's growth to stay above 40%.
If Azure falls short, or if free cash flow keeps dropping, I'd want to pay a lower price-to-earnings ratio than 27, and my buy price would fall with it. Would I buy Microsoft stock before Oct. 28? Not at roughly $530.
Sure, a strong report might raise my buy price, and shares may never drop as low as $465. But at about 31 times adjusted earnings, I think the stock already reflects most of the good news. I'd consider buying closer to $465.
Source: The Motley Fool
