Key Points

Microsoft shares have underperformed so far this year.
The July 29 earnings report may serve as a catalyst for the stock to advance higher.
Microsoft represents a compelling purchase opportunity at present.

On July 29, Microsoft (NASDAQ: MSFT) will announce its fiscal fourth quarter results, and investors should mark this date on their calendars.

This release could mark the beginning of an upward move for Microsoft following a difficult stretch in 2026. In contrast to other Magnificent Seven names that have rebounded from earlier dips, Microsoft stock has remained under pressure and sits down 20 percent year to date.

Yet several factors suggest Microsoft shares are positioned for stronger performance after the July 29 report.

Image source: Getty Images.

AI investments beginning to deliver

Investors have expressed concern over Microsoft heavy spending on artificial intelligence infrastructure. In April the company raised its capital expenditure outlook to 190 billion dollars for fiscal 2026, representing a 61 percent increase from the prior year.

The stock declined after the fiscal third quarter ended March 31 amid questions surrounding the OpenAI partnership and reports of limited profitability. Azure growth also moderated slightly during the period.

Nevertheless, clear evidence indicates that AI related investments are starting to generate returns. Azure revenue climbed 40 percent in fiscal Q3, surpassing expectations. Broader cloud revenue rose 29 percent, an improvement over the 25 percent gain recorded in Q2. Microsoft also reported a 627 billion dollar backlog at the end of March, nearly doubling from the year earlier quarter.

Management guided for Azure growth near 40 percent in Q4, pointing to modest acceleration through the second half. This pickup reflects expanded data center capacity built to meet rising demand. CEO Satya Nadella noted that the company is adding capacity in line with observed demand signals.

CFO Amy Hood previously emphasized that Azure guidance reflects allocated capacity that can be converted into revenue. The approach focuses on meeting existing demand rather than speculative expansion.

Nadella also highlighted that Microsoft AI business has reached an annual revenue run rate of 37 billion dollars, reflecting 123 percent growth from the prior year. This figure demonstrates tangible revenue expansion tied to AI rather than projections alone.

Microsoft valuation remains attractive

Microsoft recently updated its arrangement with OpenAI. Under the revised terms OpenAI is no longer the sole AI provider and Microsoft no longer shares revenue with the partner. The adjustment lowers overall exposure to OpenAI and creates room for additional revenue streams.

Microsoft is also expected to benefit from refreshed pricing and packaging of its software products alongside a new five year renewal cycle for many Office customers.

These developments coincide with historically low valuations. The stock trades at 22 times earnings and 19 times forward earnings, levels below the S and P 500 average.

The current multiple sits near the lowest point for Microsoft since 2018. The price to earnings ratio has dipped below 22 only once since then, reaching 21 in March.

At this valuation Microsoft appears undervalued, a view shared by most analysts. Approximately 95 percent of analysts rate the stock a buy, with a median price target of 550 dollars per share. That target implies roughly 41 percent upside over the next 12 months.

A solid Q4 report and constructive outlook on July 29, both of which appear likely, could provide the momentum needed for a sustained advance in Microsoft shares.

Evaluating a purchase of Microsoft shares today

Investors considering Microsoft should review additional perspectives before proceeding.

Analysts at Motley Fool Stock Advisor recently highlighted ten stocks they view as top opportunities for purchase. Microsoft did not appear on that list. The selected names are expected to deliver substantial gains over the coming years.

Historical examples include Netflix, added on December 17 2004, which produced a 395679 dollar return on a 1000 dollar investment. Nvidia, added on April 15 2005, generated a 1294805 dollar return on the same initial amount.

Stock Advisor has delivered an average return of 929 percent, significantly outpacing the 211 percent gain of the S and P 500. The latest top ten list is available through Stock Advisor membership.

*Stock Advisor returns as of July 14 2026.

Dave Kovaleski holds no positions in the securities discussed. The Motley Fool maintains positions in and recommends Microsoft. The Motley Fool maintains a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect the positions of Nasdaq Inc.