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Microsoft Q3 Revenues Jump 18% on AI & Cloud: Buy or Hold the Stock?
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Key Takeaways
Microsoft fiscal Q3 revenues rose 18% to $82.9B, driven by 29% cloud growth and strong AI momentum.
MSFT faces margin pressure as capex jumped 49% and gross margin hit its lowest level since 2022.
Microsoft guides heavy spending ahead, with rising competition and stock down 17.2% in six months.
Microsoft (MSFT - Free Report) reported third-quarter fiscal 2026 revenues of $82.9 billion, up 18% year over year (15% in constant currency). Microsoft Cloud revenues surged 29% to $54.5 billion, and commercial remaining performance obligation jumped 99% to $627 billion. Diluted earnings per share rose 23% to $4.27.
The consensus mark for fiscal 2026 earnings has moved north by 0.9% to $17.26 per share over the past 30 days, suggesting 15.07% year-over-year growth. Despite impressive headline numbers, mounting AI-related capital expenditures, narrowing margins and recent share price weakness suggest investors may be better served holding existing positions rather than chasing the stock at current levels in 2026.
Intelligent Cloud revenues rose 30% to $34.7 billion in third-quarter fiscal 2026, driven by Azure and other cloud services growth of 40% (up 39% in constant currency). Productivity and Business Processes climbed 17% to $35 billion, supported by Microsoft 365 Commercial cloud expansion of 19% and Dynamics 365 growth of 22%. The More Personal Computing segment slipped 1% to $13.2 billion, hit by Windows OEM and Devices and Xbox content. Microsoft's AI business surpassed an annualized revenue run rate of $37 billion, up 123% year over year, while Microsoft 365 Copilot crossed 20 million paid commercial seats, up from 15 million in January. Operating income jumped 20% to $38.4 billion. However, gross margin narrowed to 67.6%, the lowest since 2022, as depreciation tied to data center build-out climbed. Capital expenditures and finance leases reached $31.9 billion, up 49% year over year.
Product Momentum and Strategic Moves
Microsoft has maintained an aggressive product cadence in 2026. On March 9, the company unveiled Wave 3 of Microsoft 365 Copilot, embedding agentic capabilities into Word, Excel, PowerPoint and Outlook, alongside the introduction of Microsoft 365 E7 — the Frontier Suite combining E5, Copilot, Entra Suite and Agent 365. The same announcement opened up Anthropic's Claude models within Copilot Chat through the Frontier program. On April 27, Microsoft amended its strategic partnership with OpenAI, retaining first-shipping rights for OpenAI products on Azure while extending the IP and revenue-sharing framework into the early 2030s. On May 1, Agent 365 — the unified governance layer for AI agents — and Microsoft 365 E7 reached general availability, broadening the company's commercial AI footprint across enterprise customers worldwide.
Forward Guidance Calls for Continued Heavy Spending
For fourth-quarter fiscal 2026, Microsoft guided to revenues of $86.7 billion to $87.8 billion, with Azure cloud growth between 39% and 40% in constant currency. Capital expenditures are expected to exceed $40 billion in the fourth quarter alone, with calendar-2026 capex now projected at roughly $190 billion, including about $25 billion related to component price inflation. Management noted that capacity will remain constrained at least through 2026, while full-year fiscal 2026 operating margins are still expected to expand by approximately one percentage point year over year despite ongoing infrastructure investments and one-time retirement-related costs of around $900 million in the fourth quarter.
Share Price Movement and Competitive Landscape
Shares of MSFT have lost 17.2% in the past six-month period against the broader Zacks Computer & Technology sector’s growth of 13.6%. In the cloud arena, hyperscaler competition has only intensified. Amazon (AMZN - Free Report) -owned Amazon Web Services continues to lead overall scale, and Amazon recently secured a multi-billion-dollar OpenAI distribution arrangement that broadens Amazon's AI footprint and adds price pressure on Azure. Alphabet (GOOGL - Free Report) -owned Google has scaled Google Cloud aggressively in 2026, while its Gemini model family extends Google's enterprise AI reach into Microsoft's core productivity territory. Oracle (ORCL - Free Report) has emerged as a credible challenger in this race; Oracle's OCI infrastructure buildout and Oracle's substantial multi-year AI contracts highlight rising pressure on Azure's leadership position. With each rival enjoying expanded OpenAI model access, Microsoft's first-mover edge looks increasingly contested in 2026.
6-Month Performance
Image Source: Zacks Investment Research
MSFT is trading at a premium with a forward 12-month P/S of 8.24X compared with the Zacks Computer - Software industry's 6.99X, reflecting a stretched valuation.
MSFT’s P/S F12M Ratio Depicts Stretched Valuation
Image Source: Zacks Investment Research
Hold MSFT for Now
Microsoft's underlying business remains fundamentally healthy, anchored by accelerating Azure growth, strong Copilot adoption and a record $627 billion commercial backlog. However, the record capex pace, narrowing gross margins, intensifying hyperscaler competition and recent six-month drawdown collectively argue against fresh entries at this juncture. The amended OpenAI partnership and Anthropic-powered Cowork features deepen the platform but also let rivals access comparable AI capabilities. Existing investors may benefit from holding while AI monetization unfolds; prospective buyers might find a more attractive entry point as margin pressure plays out through fiscal 2026. Microsoft currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Microsoft Q3 Revenues Jump 18% on AI & Cloud: Buy or Hold the Stock?
Key Takeaways
Microsoft (MSFT - Free Report) reported third-quarter fiscal 2026 revenues of $82.9 billion, up 18% year over year (15% in constant currency). Microsoft Cloud revenues surged 29% to $54.5 billion, and commercial remaining performance obligation jumped 99% to $627 billion. Diluted earnings per share rose 23% to $4.27.
The consensus mark for fiscal 2026 earnings has moved north by 0.9% to $17.26 per share over the past 30 days, suggesting 15.07% year-over-year growth. Despite impressive headline numbers, mounting AI-related capital expenditures, narrowing margins and recent share price weakness suggest investors may be better served holding existing positions rather than chasing the stock at current levels in 2026.
Microsoft Corporation Price and Consensus
Microsoft Corporation price-consensus-chart | Microsoft Corporation Quote
AI and Cloud Drive Fiscal Q3 Strength
Intelligent Cloud revenues rose 30% to $34.7 billion in third-quarter fiscal 2026, driven by Azure and other cloud services growth of 40% (up 39% in constant currency). Productivity and Business Processes climbed 17% to $35 billion, supported by Microsoft 365 Commercial cloud expansion of 19% and Dynamics 365 growth of 22%. The More Personal Computing segment slipped 1% to $13.2 billion, hit by Windows OEM and Devices and Xbox content. Microsoft's AI business surpassed an annualized revenue run rate of $37 billion, up 123% year over year, while Microsoft 365 Copilot crossed 20 million paid commercial seats, up from 15 million in January. Operating income jumped 20% to $38.4 billion. However, gross margin narrowed to 67.6%, the lowest since 2022, as depreciation tied to data center build-out climbed. Capital expenditures and finance leases reached $31.9 billion, up 49% year over year.
Product Momentum and Strategic Moves
Microsoft has maintained an aggressive product cadence in 2026. On March 9, the company unveiled Wave 3 of Microsoft 365 Copilot, embedding agentic capabilities into Word, Excel, PowerPoint and Outlook, alongside the introduction of Microsoft 365 E7 — the Frontier Suite combining E5, Copilot, Entra Suite and Agent 365. The same announcement opened up Anthropic's Claude models within Copilot Chat through the Frontier program. On April 27, Microsoft amended its strategic partnership with OpenAI, retaining first-shipping rights for OpenAI products on Azure while extending the IP and revenue-sharing framework into the early 2030s. On May 1, Agent 365 — the unified governance layer for AI agents — and Microsoft 365 E7 reached general availability, broadening the company's commercial AI footprint across enterprise customers worldwide.
Forward Guidance Calls for Continued Heavy Spending
For fourth-quarter fiscal 2026, Microsoft guided to revenues of $86.7 billion to $87.8 billion, with Azure cloud growth between 39% and 40% in constant currency. Capital expenditures are expected to exceed $40 billion in the fourth quarter alone, with calendar-2026 capex now projected at roughly $190 billion, including about $25 billion related to component price inflation. Management noted that capacity will remain constrained at least through 2026, while full-year fiscal 2026 operating margins are still expected to expand by approximately one percentage point year over year despite ongoing infrastructure investments and one-time retirement-related costs of around $900 million in the fourth quarter.
Share Price Movement and Competitive Landscape
Shares of MSFT have lost 17.2% in the past six-month period against the broader Zacks Computer & Technology sector’s growth of 13.6%. In the cloud arena, hyperscaler competition has only intensified. Amazon (AMZN - Free Report) -owned Amazon Web Services continues to lead overall scale, and Amazon recently secured a multi-billion-dollar OpenAI distribution arrangement that broadens Amazon's AI footprint and adds price pressure on Azure. Alphabet (GOOGL - Free Report) -owned Google has scaled Google Cloud aggressively in 2026, while its Gemini model family extends Google's enterprise AI reach into Microsoft's core productivity territory. Oracle (ORCL - Free Report) has emerged as a credible challenger in this race; Oracle's OCI infrastructure buildout and Oracle's substantial multi-year AI contracts highlight rising pressure on Azure's leadership position. With each rival enjoying expanded OpenAI model access, Microsoft's first-mover edge looks increasingly contested in 2026.
6-Month Performance
Image Source: Zacks Investment Research
MSFT is trading at a premium with a forward 12-month P/S of 8.24X compared with the Zacks Computer - Software industry's 6.99X, reflecting a stretched valuation.
MSFT’s P/S F12M Ratio Depicts Stretched Valuation
Image Source: Zacks Investment Research
Hold MSFT for Now
Microsoft's underlying business remains fundamentally healthy, anchored by accelerating Azure growth, strong Copilot adoption and a record $627 billion commercial backlog. However, the record capex pace, narrowing gross margins, intensifying hyperscaler competition and recent six-month drawdown collectively argue against fresh entries at this juncture. The amended OpenAI partnership and Anthropic-powered Cowork features deepen the platform but also let rivals access comparable AI capabilities. Existing investors may benefit from holding while AI monetization unfolds; prospective buyers might find a more attractive entry point as margin pressure plays out through fiscal 2026. Microsoft currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.