Microsoft’s Pivotal Week: Earnings to Test AI Strategy and Valuation

Microsoft Corporation enters a critical phase this week as it prepares to release its Q2 FY 2026 financial results. The report arrives at a significant juncture for the stock, which is undergoing a reassessment following a notable correction and a period of intense AI-driven enthusiasm. The central question for investors is whether the growth trajectory of its cloud and artificial intelligence segments can justify the recent pullback and potentially reverse it.

Valuation Reset and Analyst Sentiment

The recent decline has materially altered Microsoft’s valuation. Shares currently trade at approximately 28.5 times forward earnings, a discount to the five-year average multiple of 31.5. Before the correction began in October, the forward price-to-earnings ratio stood above 32. On a trailing earnings basis, the P/E ratio is about 32, which still represents a premium to the broader market. Proponents argue this premium is supported by the company’s AI potential and ongoing infrastructure investments.

Closing the week at $468.54, the share price sits nearly 4% below its 52-week high but remains well above the 52-week low. Year-to-date performance is slightly negative, contrasting with a gain of over 13% on a twelve-month view.

Ahead of the earnings release, several analyst firms have adjusted their price targets while largely maintaining positive ratings. UBS reduced its target from $650 to $600, and Cantor Fitzgerald lowered its from $639 to $590; both firms retain “Buy” recommendations. Similarly, Mizuho analyst Gregg Moskowitz cut his target from $640 to $620, citing channel checks that suggest IT budget growth is “slower than usual” despite robust AI demand.

The bullish case remains intact for many. Jefferies analyst Brent Thill maintains a $675 price target, noting the stock has declined 18% since the Q1 report despite Microsoft securing $250 billion in OpenAI commitments and $30 billion in Anthropic Azure contracts. Concurrently, the valuation multiple has contracted by 23% as many investors rotated into semiconductor stocks.

Overall, the consensus view remains bullish: 32 of 34 covering analysts rate the stock a “Buy,” with two recommending “Hold.” The average price target of $626.14 suggests significant potential upside from current levels.

Should investors sell immediately? Or is it worth buying Microsoft?

Cloud Growth and Capital Expenditure Dynamics

All eyes will be on the performance of Azure, the company’s cloud computing platform. Management previously guided for cloud revenue growth of 37% for the quarter, a slight deceleration from the 40% growth reported in the prior quarter but still at an elevated level.

Key consensus expectations for Wednesday include:
* Earnings Per Share (EPS): $3.88–$3.91, representing roughly 20% year-over-year growth.
* Total Revenue: $80.23–$80.3 billion, an increase of about 15%.
* Intelligent Cloud Revenue: Approximately $32.41 billion, expected to grow 26.9%.
* Commercial Remaining Performance Obligations (RPO): This metric, representing future revenue to be recognized from existing contracts, was last reported at nearly $400 billion.

According to recent company statements, demand for Azure, especially for AI workloads, continues to outpace available supply. The commercial backlog has swelled, driven largely by long-term Azure commitments from major AI players.

This growth, however, comes at a substantial cost. Massive investments are pressuring free cash flow. Last quarter, Microsoft reported capital expenditures (CapEx) of $34.9 billion, with management indicating plans to increase this level over time. The company aims to expand its total AI capacity by more than 80% this year and double its global data center footprint over the next two years. These investments are reflected in free cash flow, which currently equates to only about 74% of reported net income. Investors are divided on whether these upfront costs will translate into superior future returns or weigh on margins longer-term.

A Week of High Stakes

The upcoming earnings release coincides with a busy schedule: several other Big Tech companies are reporting, and the U.S. Federal Reserve will announce an interest rate decision. This crowded calendar heightens sensitivity to any deviation from expectations.

For Microsoft shares, two factors will be particularly decisive: the actual Azure growth rate, including the contribution from AI, and the forward-looking commentary on growth, margins, and investment volume. Disappointments on these fronts could extend the recent period of weakness. Conversely, if Microsoft delivers robust growth figures, convincing commentary on AI demand, and a clear roadmap for its investments, a tangible upward reversal this week is a realistic possibility.