Microsoft Stock is STILL UNDERVALUED! | Microsoft (MSFT) Earnings Analysis! |

Microsoft stock is up nearly 17% in a single day. That's almost $500 billion worth of market cap added to this stock now trading at $455 a share. Now to be clear, the stock is still down about 11% in the last year and year to date still in the red down by about 5.7% but the last month we've now seen a strong rally up nearly 23%. And of course this comes after releasing their latest quarter's earnings report. So, complete transparency like always, Microsoft is a stock that I own in my portfolio. I've owned it for a while now and I've done very well with the position, but obviously a lot of people have concerns. The stock was down over 20% at one point this year. So, sentiment seems to be shifting. Is it going to stay at these prices? Is the stock still undervalued or is AI disrupting this business model? There's a lot we need to break down in today's video. So, let's go ahead and dive into it. And real quick before we dive in, keep in mind, like always, if you'd like to download any of the automated spreadsheets that you see in my videos and also get access to the ticker data add-on in Google Sheets that allows you to automatically import stock financials directly into your spreadsheet, then you can head over to tickerdata.com at the link in the description. Now, let's go ahead and dive in. If we look at this recent earnings report, we can see if we just look at the headlines, Q4 non-GAAP earnings per share of $4.74 was a beat by 50. So, a pretty nice beat there. And then perhaps even more impressive is revenue of 90 billion was up 17.8% year-over-year, a beat by 2.37 billion. So, toplines for Microsoft still continue to grow at a very strong rate. Now, keep in mind this was their Q4 data. So, we now officially have full 2026 data. So, if we jump over to our stock screener, let's take a look at Microsoft. Now, here's what we can see. The revenue per share jumped from 37.90 in 2025 to $4467. And earnings saw a large jump from 1370 to $18 per share. So really impressive growth. But what we have to keep in mind is what's going on with free cash flow. If we jump over to our dividend breakdown sheet, yes, we could analyze the dividend metrics and maybe we'll do that in a moment. But come over here and look at free cash flow. The trend in free cash flow for Microsoft is now that free cash flow has declined two years in a row. Now, it's not any secret why this is happening. They're now starting to fund the expensive capex cycle. But more on that in just a moment. We'll break this down by jumping over to their recent earnings report and taking a deeper dive. So, a couple of questions we need to ask is where is this topline growth actually coming from? The company has three primary business segments. productivity and business processes, intelligent cloud, and then more personal computing. The vast majority of this growth, in fact, all of it is coming from intelligent cloud and productivity and business processes. In fact, more personal computing saw a little bit of contraction over the last year, down by about 4%. Meanwhile, intelligent cloud is just seeing ridiculous growth, up 31%, while productivity and business processes continues to see very strong growth as well at about 14% growth. Now, if we talk about margins for a moment, we can see they've essentially stayed right where they're at. For reference, if we jump over to our profitability sheet and take a look at Microsoft, what we can see is the gross profit ratio has slightly expanded over the last decade. In 2015, it was 64.7. Last year, about 68.8. So, a little bit of expansion, which is great. Overall, relatively stable, but we can see in the recent quarter we saw a slight reduction with gross margin percentage at about 67%. Certainly nothing that I think we should be concerned over. And we can also see operating income percentage stayed right at 45%. But here's where things start to get interesting. When we start to have the conversation surrounding capital allocation, free cash flow, which remember is the ultimate driver of intrinsic value over the long term was 19.6 billion down by 23%. Now why is this the case? Well, I already mentioned it. It's reflecting higher capital expenditures as they invest against their strong demand. And so this is the same capex cycle that we're seeing with Google, that we're seeing with Meta right now. However, the situation for Microsoft is a little bit different. We just saw Google post negative free cash flow for the first time because they're spending so much on capex. We see Meta is following suit. But that's not the case for Microsoft. While free cash flow has certainly declined, 2026, they still posted 66.9 billion of free cash flow despite capital expenditures ramping up significantly. Now to be completely fair, 2027 capex spending is ramping up to about 196 billion. So will that put them in negative free cash flow territory? Well, that's an important question. What we can see is the consensus analyst outlook for Microsoft when it comes to their free cash flow. This is coming from S&P Global is that 2027 free cash flow will still remain positive at about 55 billion and then 2028 the recovery process is already going to start. Essentially, from a free casual perspective, Microsoft is substantially stronger than their peers, particularly in the short term. And part of the result of this is they're not having to dip into debt markets the exact same way their peers are. For example, look at this. Meta has already issued since 2025 over 50 billion of debt. Google's even issued 100-year bonds. So, not only are these stocks turning to negative free cash flow now, but they're weakening the balance sheet. They're taking on more debt to fund their capex cycle. Microsoft is generating so much free cash flow, they don't have to do that. This is one of the biggest advantages for Microsoft right now. And here's where things really start to get interesting. If you really want to understand what's going on with these big tech stocks right now, you need to look at the bond market. You don't understand the stock market until you understand what's happening in the bond market. What we're looking at here is these lines are tracking the 5-year credit default swap spreads, also known as CDS spreads. This is essentially insurance against a company failing to repay its debt. Now, if these spreads are increasing, what does that mean? Well, it means the perceived credit risk is increasing. If the spread is following, it means that investors are viewing that debt as very safe. Notice what's happening to a lot of big tech stocks. The spreads are increasing. investors are demanding higher yields to take on this debt risk. However, you'll notice Microsoft is the stock that is seeing the spread increase the least. Meanwhile, stocks like Meta, obviously SpaceX, Oracle, and even Amazon have seen in the last few months the spread increase by quite a bit. Investors have concerns about the debt levels. All of this is tied together and what it's telling us is the market is actually starting to feel better about Microsoft's debt level, about their capex spending. And there's a couple of comments in the recent earnings presentation that should make investors understand why this is the case. To start, Amy Hood, the executive VP and CFO, said that commercial momentum strengthened, reporting commercial bookings grew by 18% when excluding the impact from OpenAI and commercial remaining performance obligation grew 84% to 678 billion. What does this mean? Well, it means yes, Microsoft's capex spending is increasing, but here's the good news. They already have an enormous amount of contracted demand supporting these investments. This is their backlog. This is revenue that has not yet been recognized. And based on what they told us, approximately 30% of that backlog should be recognized over the next 12 months. And the near-term portion grew by 37%. Now, what's the caveat to this? When Microsoft initially saw a large sell-off earlier this year at the end of January, that was in large part due to the fact that a lot of their backlog was directly tied to OpenAI. But as I was reading through their earnings call transcript, I saw a statement that I think a lot of people seem to be glossing over. Yes, one of the biggest investor concerns is that Microsoft's AI growth was too dependent on open AI, but look what they stated. Nearly 90% of fullear Microsoft cloud revenue came from customers outside Frontier Model companies, which of course would include Open AI. This is absolutely massive, and I think this alone is enough of a statement to make Microsoft climb higher, which of course is exactly what we're seeing happen today. So, all in all, I think this was a pretty phenomenal earnings report. But even with that being said, in terms of valuation, Microsoft is still trading significantly below its historic valuation multiples. The PE multiple sitting at 21.28, while their average over the last 5 years is about 30. So what do forwardlooking returns potentially look like for Microsoft at current levels? Well, let's come and plug in Microsoft into our valuation sheet. And here's what we can see. If we come down here, one of the cool features of ticker data is you can automatically import into your spreadsheet the projected EPS kagger from analysts. This is the average estimate. They're projected to grow EPS from 2026 to 2030 at 18.2%. So 18.2% EPS Kagger. That's quite strong, particularly for a stock that's been around this long, and it's already a nearly $3 trillion market cap stock. So let's run through a few different scenarios. The Trunk 12month PE multiple is 25.3. Assuming the PE multiple stays right where it's at, which again remember is already historically low, basically at its 5-year low. basically at a 5-year low. If it continues to stay right at these levels, and their PE multiple is 25.3 by the year 2030, you're still looking at compounded returns annually of about 13% and that doesn't include the dividend yield sitting at about 0.78%. So, in reality, you're looking at about 13 1.5 closer to 14%. But what if Microsoft does produce these results? If they actually achieve this EPS cagger of 18.2%, we will see multiple expansion down the road. It's likely that PE multiple starts to jump back to its historic market averages. And even if it doesn't make it all the way back to there at a 28 PE multiple, this is where returns really start to look attractive. We're talking about 15 to 16% compounded returns every single year. And I think these projections are completely within reason. We're even starting to see sentiment shift around Azure and Copilot, which was not the case just 6 months ago. Microsoft is monetizing AI across the entire stack at a much better level than in previous months. Their CEO put out a great illustration of this over on X. If you haven't seen it already, be sure to check that out. So, Microsoft is in a very unique position because their AI buildout, their capex cycle. Yes, capex spinning is ramping up significantly, but this looks very different from the vast majority of other hyperscaler stocks. Microsoft isn't having to dip deeply into debt markets. They're going to remain free cash flow positive over the next few years, unlike Meta and Google and many of the other hyperscalers. And at the exact same time, their backlog is growing and they're becoming less reliant on Open AI. And on top of all this, they're monetizing AI at a better rate. Copilot is actually becoming a little more attractive. So, all in all, I think this was just a stellar earnings report for Microsoft, and the market seems to agree with me, now up 17% on the day. I was recently adding shares when it was trading below $400 a share. And if it gets back to that level, I think I would probably add more. So, I'm happy to continue to hold Microsoft at its current levels, and I think there's still upside from current prices. So, go ahead and let me know what you think of Microsoft in the comments down below if you plan on buying or selling. And again, like always, if you'd like to download any of the spreadsheets you saw in this video and also get access to the ticker data add-on in Google Sheets that allows you to automatically import stock financials directly into your spreadsheet, then you can head over to tickerdata.com at the link in the description. So, with all that being said, thank you guys so much for watching and please don't forget to like and subscribe to the