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Volatility gripped the stock market last week amid concerns about the sustainability of the artificial intelligence (AI) infrastructure spending boom. The S&P 500 experienced a modest decline, but it continues to trade at a historically expensive valuation, so strong corporate earnings will be necessary to keep this bull market going. As a result, all eyes are on the current reporting season.
Microsoft ( MSFT -1.93% ) will release its operating results for its fiscal 2027 first quarter (ended Sept. 30) on Oct. 28, and Wall Street will be squarely focused on the Azure cloud platform and Copilot virtual assistant, which are central to the company's AI strategy. Microsoft stock is attractively valued heading into the report, so here's why I predict it will climb in the weeks and months that follow. Image source: Getty Images.
Positioned to lead the enterprise AI race AI is a powerful tool in an enterprise because it can dramatically improve productivity by automating tasks, analyzing large volumes of data, and even generating content like images and computer code. Microsoft is helping businesses tap into the power of AI through Copilot and Azure, and both represent enormous opportunities for the company. The Copilot assistant is embedded in Microsoft's legacy software products like Windows and Edge for free.
But enterprises can also add it to the 365 productivity suite (which includes Word and Excel) for an additional monthly subscription fee. As of June 30, organizations worldwide were paying for 30 million Copilot licenses for 365, a staggering 50% increase from just three months earlier. However, organizations pay for more than 400 million 365 licenses for their employees, so Copilot adoption is still in the very early stages.
Investors should keep an eye out for some updated numbers on Oct. 28. MSFT Microsoft $529.05 -$10.39 (-1.93%) NASDAQ · As of 4:00 PM ET 10/16/26 Then there is the Azure cloud platform, which provides every tool enterprises need to deploy AI software applications. That includes computing capacity from specialized data centers, more than 11,000 ready-made foundation models, and a platform called Foundry where they can design and manage custom AI agents.
Microsoft built 88 new data centers during fiscal 2026 as part of a two-year plan to double its global infrastructure footprint. This will help Azure convert its enormous $678 billion in remaining performance obligations (RPO) into revenue, which effectively represents the platform's order backlog from customers who are waiting for more infrastructure to come online. Azure's revenue growth accelerated to 43% in the final quarter of fiscal 2026, so the platform was carrying significant momentum into the fiscal 2027 first-quarter earnings report.
A further acceleration will be very bullish for Microsoft stock, but so will growth in the company's RPO, because it can be a good indicator of future revenue. Microsoft stock could soar after Oct. 28, but there is one caveat Based on Microsoft's fiscal 2026 earnings of $17.95 per share, its stock is trading at a price-to-earnings (P/E) ratio of 30.1, which is a discount to its five-year average of 32. Plus, the stock has a forward P/E of 27.3 based on Wall Street's average fiscal 2027 earnings estimate of $19.78 per share (provided by Yahoo!
Finance), leaving even more room for potential upside. MSFT PE Ratio data by YCharts Nevertheless, the AI industry faces increasing doubts right now that could jeopardize Microsoft's ability to actually deliver on Wall Street's fiscal 2027 earnings estimate. Labs like OpenAI and Anthropic are facing questions about their valuations and growth rates, which could reduce their ability to raise more money from investors.
Moreover, neocloud companies like CoreWeave are dealing with a surge in borrowing costs on concerns they won't be able to deliver on their lofty future projections, which could weigh on the stock market overall. OpenAI has committed to spend more than $300 billion on Microsoft Azure's cloud services during the next few years, but it doesn't actually have that money today. OpenAI will have to increase its revenue significantly and also raise more money to meet all of its commitments, so if it fails on either front, Microsoft's RPO could take a hit.
For all of those reasons, the first-quarter earnings report is likely to set the tone for Microsoft stock for at least the next few months. I think there could be upside ahead based on its attractive valuation, and the sheer size of its RPO –- even if we exclude OpenAI's contribution entirely, Azure is still likely to be backlogged for the next couple of years. However, investors might want to manage their risk by using a small position size given the uncertain environment.
Source: The Motley Fool
