Microsoft Before Q1 Earnings: Should Investors Buy the Stock?

Microsoft MSFT is slated to report first-quarter fiscal 2026 results on Oct. 29.The Zacks Consensus Estimate for revenues is pegged at $74.96 billion, indicating growth of 14.3% from the figure reported in the year-ago quarter.The consensus mark for earnings has remained steady at $3.65 per share over the past 30 days, suggesting 10.61% year-over-year growth.Image Source: Zacks Investment ResearchMSFT Earnings Surprise HistoryIn the last reported quarter, the company delivered an earnings surprise of 8.96%. The company’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 7.02%.Microsoft Corporation Price and EPS Surprise Microsoft Corporation price-eps-surprise | Microsoft Corporation QuoteEarnings Whispers for MSFTOur proven model does not conclusively predict an earnings beat for Microsoft this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. This is not the case here. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.MSFT has an Earnings ESP of -1.17% and a Zacks Rank #2 at present. You can see the complete list of today’s Zacks #1 Rank stocks here.Factors Shaping MSFT’s Upcoming Q1 ResultsMicrosoft's upcoming fiscal first-quarter 2026 results are likely to be supported by continued momentum in cloud and AI infrastructure investments. The tech giant positioned itself strategically during the July-September 2025 period through significant product launches and platform enhancements that strengthened its competitive moat in enterprise AI adoption.Microsoft projected revenues between $32.2 billion and $32.5 billion for Productivity and Business Processes, representing growth of 14% to 15%, with model estimates indicating 14.2% year-over-year growth to $32.3 billion.Microsoft 365 Commercial cloud revenues are expected to grow between 13% and 14% in constant currency (cc). The segment is expected to have benefited from relatively stable business trends compared to the prior quarter, with continued average revenue per user expansion driven by E5 suite adoption and Microsoft 365 Copilot deployment.The quarter saw substantial Microsoft 365 Copilot feature enhancements, including the rollout of GPT-5's real-time router capability in August that enabled Copilot to intelligently select between high-throughput and deeper reasoning models based on task complexity. Voice interaction capabilities launched on the Microsoft 365 Copilot mobile app for iOS during August, enabling users to interact with Copilot through natural language speech. SharePoint agents became discoverable in the Teams app store in September, enhancing collaboration and making AI-enhanced support more accessible to users.The reimagined Microsoft Marketplace launched during September, introducing a new AI apps and agents category that extended Microsoft 365 Copilot and Azure AI Foundry while expanding discoverability across a unified Microsoft storefront. These product enhancements are likely to have contributed to improved adoption metrics and supported continued ARPU growth through the quarter.LinkedIn's performance is expected to have delivered high single-digit revenue growth despite ongoing headwinds in the hiring market. The professional networking platform is likely to have maintained steady momentum through its talent solutions and marketing solutions offerings.The Intelligent Cloud segment is expected to remain capacity-constrained through the first half of fiscal 2026, even as Microsoft continues bringing additional data center capacity online. Management anticipated the segment would generate revenues between $30.1 billion and $30.4 billion, representing growth of 25% to 26%. Our model estimate for this segment is pegged at $30.2 billion, indicating growth of 25.4% from the figure reported in the year-ago quarter.The company's aggressive infrastructure buildout positioned it well to capitalize on strong AI workload demand, though capacity constraints are likely to have continued to moderate what would otherwise have been even stronger growth rates.Management projected Azure revenue growth of approximately 37% in cc. Azure received a significant boost from announcements made at Microsoft Build 2025 in early August, including the general availability of Azure AI Foundry Agent Service, multi-agent orchestration capabilities, and the introduction of agentic retrieval through Azure AI Search. These enhancements, including improvements to answer relevance by approximately 40% on complex questions in early testing, strengthened Azure's position as the leading enterprise AI platform. The company's $368 billion contracted backlog provided substantial visibility into future revenue streams and supported the massive capital expenditure program.The on-premises server business is projected to have experienced revenue declines in the low to mid-single digits as customers continued their ongoing shift to cloud offerings.Microsoft projected More Personal Computing revenues between $12.4 billion and $12.9 billion for the quarter, with model estimates indicating a 2.9% year-over-year decline to $12.7 billion. According to the preliminary results from the International Data Corporation Worldwide Quarterly Personal Computing Device Tracker, third-quarter 2025 worldwide PC shipments reached 75.8 million units, up 9.4% year over year. The competitive landscape shows strong results, with Lenovo LNVGY, Hewlett Packard HPE and Dell Technologies DELL achieving 17.3%, 10.7% and 2.6% shipment growth, respectively.Microsoft’s Windows OEM and Devices revenues are expected to have declined in the mid to high single digits, with management anticipating that elevated inventory levels from the prior quarter would normalize during the period.The segment received a potential boost from the general availability of Windows 11 version 25H2 on Sept. 30, 2025, which represented a significant platform update. Throughout the quarter, Microsoft rolled out enhanced Windows capabilities, including AI-powered features in File Explorer, improved security controls, and new Copilot+ PC functionalities.The Gaming division is expected to have experienced robust activity during the quarter under review. Major releases included Grounded 2 launching into Game Preview on July 29, Tony Hawk's Pro Skater 3+4 on July 11, and Gears of War: Reloaded on Aug. 26. The company showcased its gaming strategy at the Xbox Games Showcase in June, with numerous titles launching throughout the summer period. Xbox also expanded its cloud gaming capabilities in July, enabling Game Pass Ultimate members to stream more than 250 select games they own beyond the Game Pass catalog through the Xbox PC app. These initiatives are likely to have supported Microsoft's guidance for mid-single-digit Gaming revenue growth and high single-digit growth in Xbox content and services.Search and news advertising ex-TAC revenue growth is projected in the low to mid-teens, normalizing from the prior quarter's elevated levels that benefited from third-party partnerships.Strategic Positioning and Infrastructure InvestmentsMicrosoft's capital expenditure guidance of more than $30 billion for the quarter under review reflects the company's continued commitment to scaling AI infrastructure to meet strong customer demand signals. The investment strategy emphasized short-lived assets like servers, GPUs, CPUs, network and storage, which management indicated were directly correlated to the company's contracted backlog and demand curve.Microsoft Cloud’s gross margin percentage was expected to be approximately 67%, down year over year due to the ongoing impact of scaling AI infrastructure. This compression reflected the company's prioritization of capacity buildout to capture the substantial AI opportunity, even at the expense of near-term margin performance.MSFT Price Performance & Stock ValuationShares of MSFT have gained 24.2% in the year-to-date period compared with the broader Zacks Computer & Technology sector’s growth of 25.9%. Shares of LNVGY, HPE and DELL have gained 15.7%, 10.1% and 37.7%, respectively.Year-to-date PerformanceImage Source: Zacks Investment ResearchNow, let’s look at the value Microsoft offers investors at current levels. MSFT is trading at a premium with a forward 12-month P/S of 11.59X compared with the Zacks Computer - Software industry’s 8.61X, reflecting a stretched valuation.MSFT’s P/S F12M Ratio Depicts Stretched ValuationImage Source: Zacks Investment ResearchInvestment ThesisMicrosoft represents a compelling investment opportunity ahead of fiscal first-quarter 2026 results, despite premium valuation and intensifying competition. The company's unmatched AI infrastructure investments, projected 37% Azure growth, and $368 billion contracted backlog provide exceptional revenue visibility. Copilot's accelerating enterprise adoption, strategic OpenAI partnership, and comprehensive platform spanning cloud to productivity applications create durable competitive advantages. While trading at elevated multiples, Microsoft's double-digit revenue growth guidance, expanding total addressable market in AI, and demonstrated ability to monetize massive infrastructure spending justify the premium. Strong execution across Intelligent Cloud, sustained Microsoft 365 momentum, and robust Gaming performance support a Buy recommendation.ConclusionMicrosoft's fiscal first-quarter 2026 results are poised to showcase robust cloud and AI momentum, supported by strong Azure demand, expanding Copilot adoption, and strategic platform enhancements. Despite premium valuation and competitive pressures, Microsoft's comprehensive ecosystem and execution capabilities make it an attractive investment ahead of earnings.Beyond Nvidia: AI's Second Wave Is HereThe AI revolution has already minted millionaires. But the stocks everyone knows about aren't likely to keep delivering the biggest profits. Little-known AI firms tackling the world's biggest problems may be more lucrative in the coming months and years.See "2nd Wave" AI stocks now >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Microsoft Corporation (MSFT): Free Stock Analysis Report Dell Technologies Inc. (DELL): Free Stock Analysis Report Lenovo Group Ltd. (LNVGY): Free Stock Analysis Report Hewlett Packard Enterprise Company (HPE): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).Zacks Investment ResearchWeiter zum vollständigen Artikel bei Zacks Weiter zum vollständigen Artikel bei Zacks