Microsoft (NASDAQ:MSFT) is poised to release its Q4 FY26 earnings, with its stock trading significantly below its peak despite strong performance in Azure and AI. The company’s AI business has reached a $37 billion annual run rate, and Azure continues to grow at 40%.
Key investment highlights include an attractive valuation with a forward P/E of 20, robust shareholder returns including a $3.56 annual dividend, and a powerful growth engine fueled by AI and cloud services. Despite high capital expenditures, a massive $627 billion RPO suggests strong future revenue realization.
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Microsoft (NASDAQ:MSFT) is set to report its fiscal Q4 2026 earnings on July 29. Despite a significant 24.69% drop in its stock price over the past year, underlying business performance, particularly in Azure and artificial intelligence, shows accelerating demand.
Last quarter, Microsoft's Azure cloud platform experienced robust growth of 40%. The company's AI initiatives have achieved an impressive $37 billion annual revenue run rate, and its commercial remaining performance obligations have nearly doubled to $627 billion. However, the stock is currently trading at $381.70, with a forward earnings multiple of approximately 20.
Three Key Arguments for Investing in Microsoft Pre-Earnings
1. Attractive Valuation: Microsoft's forward P/E ratio stands at 20, with a PEG ratio of 1.18. This valuation is notably lower than its historical trading range during the AI boom. The stock's 52-week high of $551.05 is considerably higher than its current price of $381.70. Furthermore, the consensus analyst target of $556.75 is supported by a strong analyst sentiment, with 54 buy ratings and no sell recommendations.
2. Robust Income and Capital Returns: Microsoft offers an annual dividend of $3.56 per share. In Q2 FY26, the company returned $12.7 billion to shareholders, marking a 32% year-over-year increase. Its financial health is underscored by a low debt-to-equity ratio of 0.18 and an interest coverage ratio of 53.89x, indicating a strong balance sheet. The business also boasts an excellent return on equity of 33.28%.
3. Powerful Growth Engine: The company's growth trajectory is propelled by several factors. Azure's 40% growth last quarter, coupled with the AI business reaching a $37 billion annual run rate (a 123% year-over-year increase), highlights significant momentum. Commercial remaining performance obligations nearing $627 billion, almost doubling year over year, further solidifies its future revenue potential.
Can a $627 Billion Backlog Justify Microsoft's AI Investments?
A primary concern for Microsoft and other hyperscalers is the significant capital expenditure required for AI infrastructure. Microsoft invested $30.88 billion in capital expenditures last quarter, an 84.39% increase year over year. Skeptics question the return on this substantial spending. However, the $627 billion in remaining performance obligations (RPO) offers a strong indicator of future revenue realization from these investments. Customers have already committed to these services, with approximately 25% of the RPO expected to be recognized as revenue within the next 12 months, a 39% year-over-year increase.
With a rapidly expanding commercial backlog, a rock-solid balance sheet, and Azure outperforming AWS in growth, Microsoft appears exceptionally well-positioned to translate its substantial AI investments into sustained earnings and cash-flow growth for years to come.
