3 Reasons Why Microsoft Stock Looks Cheap and Has a Strong Buy Case

By Joel South Published May 6, 7:30AM EDT

Quick Read

Microsoft (MSFT) trades at a forward P/E of 22 with AI business growing at triple digits, a $627 billion commercial backlog (up 99% YoY), and Azure expanding at 40% with the AI franchise hitting a $37 billion annualized run rate.
Microsoft’s valuation has reset 14% year-to-date despite accelerating fundamentals, with management guiding another year of double-digit revenue and operating income growth while maintaining a 33% return on equity and 46% operating margins.

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3 Reasons Why Microsoft Stock Looks Cheap and Has a Strong Buy Case — © 24/7 Wall St.

Microsoft (NASDAQ:MSFT | MSFT Price Prediction) is the easiest large-cap decision a retirement portfolio will make this year, with shares trading at a forward P/E of 22 while the AI business compounds at triple digits and a contracted backlog underwrites years of revenue. The pullback to around $411 from the 52-week high of $552.45 hands long-term buyers a discounted entry.

1. The Valuation Has Quietly Reset

MSFT sits down 14% year to date and down 4% over 12 months, even as fundamentals accelerated. The stock changes hands at a trailing P/E of 25 against 23% YoY earnings growth and a PEG of 1.29. Wall Street’s average target of $560.77, anchored by 51 Buy ratings, three Holds and zero Sells, implies the market is mispricing one of the highest-quality cash machines in the index. Return on equity stands at 33% with operating margins of 46%. That is rarely available at this multiple.

2. The Backlog Is a Retirement Investor’s Dream

Commercial remaining performance obligations increased to $627 billion, up 99% year over year, with CFO Amy Hood noting “roughly 25% will be recognized in revenue in the next twelve months, up 39% year over year.” Azure grew 40%, and the AI franchise hit a $37 billion annualized run rate, up 123%. Hood’s guide is direct: “we expect another year of double-digit revenue and operating income growth in FY ’27.” The dividend, $3.56 per share at a 1% yield, sits on a payout ratio that leaves enormous room for raises.

3. The Earnings Catalyst Is Already in Motion

Q3 FY26 delivered EPS of $4.27 versus the $4.07 estimate, the fourth consecutive beat, on revenue of $82.89 billion, up 18% YoY. Operating cash flow reached $46.68 billion, up 26%. The next report lands July 29, 2026, with management guiding Azure growth between 39% and 40% in constant currency for Q4.

The Capex Concern, Dismissed

Yes, capex jumped 84% YoY to $30.88 billion, with calendar 2026 capex expected near $190 billion. Bears call it overspending. The $627 billion RPO, 40% Azure growth, and 19% return on invested capital say otherwise. Hood was blunt: “We remain confident in the return on these investments given higher demand signals and increasing product usage.” Demand still outstrips supply.

For long-term investors, Microsoft’s setup looks built to compound over the next decade.

About the Author Joel South →

Joel South covers large-cap stocks, dividend investing, and major market trends, with a focus on earnings analysis, valuation, and turning complex data into actionable insights for investors.

He brings more than 15 years of experience as an investor and financial journalist, including 12 years at The Motley Fool, where he served as an investment analyst, Bureau Chief, and later led the Fool.com investing news desk. He has also co-hosted an investing podcast and appeared across TV and radio discussing market trends.