I Graded Microsoft’s Latest Report on 3 Things. Here’s My Verdict on the Stock.

Microsoft (MSFT -1.55%) posted results for the fiscal first quarter of 2027 (the three months ending Sept. 30, 2026) on Wednesday, Oct. 28. Revenue climbed 19% year over year to $92.3 billion, and earnings per share grew 18% on a non-GAAP (adjusted) basis.

The stock hardly moved. Shares trade near $530 as I write, about 2% under the record close of $543.45 they set on Oct. 13.

This quiet response makes sense to me. The quarter combined great growth in Microsoft‘s cloud business with another big jump in spending. I graded the report on the three things I think matter most to shareholders today: Azure’s growth against the company’s own forecast, spending and margins, and the outlook.

Image source: The Motley Fool.

1. Azure beat Microsoft’s forecast

I give Azure an A.

In early September, Microsoft narrowed what it counts as revenue from Azure, its cloud computing platform, and changed its forecast to match. The forecast was for Azure revenue growth of 44% to 45% in constant currency in the fiscal first quarter. Azure instead grew 48%. And it did that even though some third-party data center capacity Microsoft expected in the quarter was late.

Showing how high demand for the platform still is, Azure’s growth has sped up sharply over the last year. Under the new definition, it grew 40% a year ago, 42% in the fiscal fourth quarter (the period that ended in June), then 48% in the September quarter. In other words, Azure is growing faster today than it was a year ago, even after passing $100 billion in revenue in fiscal 2026.

“Customer demand continues to exceed available supply,” CFO Amy Hood said on the company’s fiscal first-quarter earnings call.

Earlier this month, I wrote that I thought Microsoft shares needed Azure to keep growing faster than 40%. It cleared that bar easily.

2. Cash flow took a hit

I’d give spending and margins a C+.

Capital expenditures came to $45.2 billion in the fiscal first quarter. This compares to $34.9 billion a year ago (up around 30%) and $41 billion in the fiscal fourth quarter. Of course, the total could have been higher had the delayed capacity arrived on time.

The spending is hurting free cash flow. Cash flow from operations climbed 29% year over year to $58 billion. But free cash flow dropped around 27% to $18.6 billion, down from $25.7 billion a year earlier and $19.6 billion in the fiscal fourth quarter.

Yes, Microsoft’s operating margin inched up to 50%, from 49% a year ago. But Microsoft Cloud’s gross margin dipped to 66%, from 68% a year earlier, because lower-margin Azure made up a bigger part of cloud sales.

The money is going into capacity that customers already want. Still, free cash flow shrinking while profits grow isn’t a trend I can grade far higher.

3. Azure should speed up again

The outlook gets a B+.

For the fiscal second quarter, management forecast revenue between $96 billion and $97.1 billion, or growth of 18% to 19%, around the same rate as the fiscal first quarter. More importantly, management expects Azure revenue to climb 49% to 50% in constant currency.

But management also expects operating margins to dip slightly year over year. And it sees Windows OEM and devices revenue dropping in the mid-30% range, partly because of lower PC demand and a year-ago quarter that got a boost from the end of Windows 10 support. Plus, capital expenditures should pass $50 billion in the fiscal second quarter, taking spending in calendar 2026 to around $170 billion.

I’d still call it a strong outlook, as Azure is arguably the figure that matters most for the stock.

MSFT – Microsoft

$521.91-$8.23 (-1.55%)

NASDAQ · As of 4:00 PM ET 10/30/26

Is Microsoft stock a buy now?

Overall, the report gets an A, a C+, and a B+, which is better than I thought going in.

In the past four reported quarters, Microsoft’s adjusted earnings per share totaled about $18.04. With the stock around $530, shares cost about 29 times adjusted earnings. Before the report, the stock cost about 31 times adjusted earnings.

Last weekend, I wrote that I’d want to buy the stock closer to $465. The Azure grade is what moves me. With growth well above my 40% bar, I’m less worried the stock might deserve a lower price-to-earnings multiple than I used. And because my buy price is linked to adjusted earnings, a quarter like this raises it.

But the spending grade stops me from paying $530. With free cash flow shrinking, I think 29 times adjusted earnings already reflects most of the good news. I’m closer to buying than I was a week ago. But I’d still want a lower price.

Source: www.fool.com — article syndicated from the publisher’s feed; all rights remain with the original publisher.