Microsoft Earnings Preview: Get Ready for Soaring AI Spending to Sink MSFT Stock

There’s no doubt that artificial intelligence spending – the hundreds of billions of dollars that top companies are doling out for servers, connectivity, data centers, and cooling systems – is making investors nervous. The most recent example was Alphabet (GOOG) (GOOGL), which issued a great earnings report on July 22, increased its capex forecast by $15 billion to $205 billion, and promptly saw its shares drop 6% the next day.

Will Microsoft (MSFT) suffer the same fate when it reports earnings for its fiscal fourth quarter on July 29? Analysts at BNP Paribas are already projecting that Microsoft will spend a whopping $262 billion on capital expenditures in its 2027 fiscal year. That marks a huge increase from fiscal 2026, in which Microsoft spent only $104.3 billion in the first three quarters.

BNP analyst Stefan Slowinski still has a bullish outlook on Microsoft, projecting fiscal year 2027 revenue growth of 18%, versus the consensus estimate of 16.8% growth. So certainly, there’s a strong argument to be made for the capex spending. Will the market agree? Let’s dive into this “Magnificent Seven” stock.

About Microsoft Stock

Headquartered in Redmond, Washington, Microsoft is one of the largest and most broad-based tech companies in the world. The company is best known for its foundational operating system of Windows, its enterprise cloud platform of Azure, and its flagship 365 suite of enterprise software tools, which include Word, PowerPoint, Excel, Outlook, and OneNote. Microsoft says more than 3.7 million companies use its Microsoft 365 suite. 

And its Microsoft Azure cloud has 21% of the global market share, putting it in the number two spot behind only Amazon (AMZN), which has 28%. In the fiscal third quarter, Microsoft said its 365 Commercial Cloud revenue grew by 19%.

But those accomplishments haven’t translated into stock price performance. Microsoft stock is down 24.6% in the last year, by far underperforming both the S&P 500 Index ($SPX) and the Roundhill Magnificent Seven ETF (MAGS) that tracks the performance of Amazon, Microsoft, Alphabet, and the other four members of the grouping – Tesla (TSLA), Nvidia (NVDA), Apple (AAPL), and Meta Platforms (META).

The dip in stock price has pushed Microsoft’s forward price-to-earnings ratio to 20.61 – its lowest point in 10 years. By historical valuations, Microsoft stock is shockingly cheap right now – but investors are still taking a pass.

Microsoft Beats on Earnings

Quarterly earnings are rarely a problem for Microsoft. The vaunted tech company has a strong track record of exceeding expectations, and it would be a shock if it didn’t hit its marks when it reports on July 29.

Earnings for the fiscal third quarter showed revenue of $82.9 billion, up 18% from a year ago. Operating income was $34.4 billion, up 20%, and earnings per share of $4.27 beat analysts' expectations for $4.07.

The biggest growth, not surprisingly, was in the company’s Intelligent Cloud division that includes Microsoft Azure and cloud services. Revenue in that segment jumped 30% from a year ago to $34.7 billion, while the Productivity and Business Processes segment that contains Microsoft 365 and LinkedIn grew 17% to $35 billion. The only segment that dropped was More Personal Computing, which includes the Windows operating system, the Bing search engine, Surface tablets, and Xbox gaming consoles. That segment fell 1% to $13.2 billion.

 Analysts are expecting fiscal fourth-quarter earnings of $4.21 per share, which would be a gain of 15.34% from last year; and 2026 full-year EPS of $16.70 per share, up 22.43%.

What Do Analysts Expect for MSFT Stock?

When dozens of experts come to the same conclusion, the result shouldn’t be ignored. Of 51 analysts who cover Microsoft stock, 46 have “Buy” ratings and the rest suggest holding. Analysts have a mean price target of $544.92, which represents potential upside of 42.7%.

So, the sentiment here is clear. Microsoft is doing exceptionally well, and analysts are bullish about its prospects. But the market is punishing Microsoft and other hyperscalers currently because it is nervous about the amount of capex going to servers, storage, and connectivity in data centers.  

Microsoft stock appears as a long-term play. But investors could expect a dip when Microsoft reports its full-year earnings next week.