Why Is Microsoft (MSFT) Up 4.7% Since Last Earnings Report?

A month has gone by since the last earnings report for Microsoft (MSFT). Shares have added about 4.7% in that time frame, underperforming the S&P 500.

But investors have to be wondering, will the recent positive trend continue leading up to its next earnings release, or is Microsoft due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Microsoft Q3 Earnings Beat Estimates as Cloud and AI Drive Results

Microsoft reported third-quarter fiscal 2026 earnings of $4.27 per share on a non-GAAP basis (excluding OpenAI investment impacts), which increased 21% on a year-over-year basis and 18% in constant currency (cc). The figure beat the Zacks Consensus Estimate by 4.91%. On a GAAP basis, diluted earnings per share rose 23% to $4.27.

Revenues of $82.9 billion increased 18% year over year and beat the consensus mark by 1.83%. At cc, revenues grew 15% year over year, showcasing strong demand for cloud and AI offerings.

Microsoft Cloud revenues totaled $54.5 billion, up 29% year over year (25% in cc). The Microsoft Cloud gross margin percentage was 66%, declining from the prior year due to ongoing AI infrastructure investments and growing AI product usage, partially offset by efficiency gains in Azure and Microsoft 365 Commercial cloud.

Commercial remaining performance obligation reached $627 billion, marking 99% year-over-year growth. Microsoft's AI business surpassed an annual revenue run rate of $37 billion, growing 123% year over year, encompassing revenue from customers building AI solutions on Azure, frontier model companies and first-party AI applications and services.

MSFT’s Q3 Segment Performance

Productivity & Business Processes

The Productivity & Business Processes segment generated $35.0 billion in revenues, representing 42.2% of total revenues. The segment grew 17% year over year (13% in cc), driven by strong performance in Microsoft 365 Commercial cloud.

Microsoft 365 Commercial cloud revenues increased 19% (15% in cc). ARPU growth was again led by E5 and Microsoft 365 Copilot. Strong execution and improving product quality drove accelerating Microsoft 365 Copilot seat adds, which increased 250% year over year, representing the fastest growth since launch.

Microsoft 365 Copilot paid seats now exceed 20 million. The number of customers with more than 50,000 seats quadrupled year over year, with Accenture representing the largest Copilot win to date with over 740,000 seats. Bayer, Johnson & Johnson, Mercedes, and Roche each committed to 90,000 or more seats.

Microsoft 365 Consumer cloud revenues jumped 33% (29% in cc), again driven by ARPU growth. Microsoft 365 Consumer subscriptions grew 7%.

LinkedIn revenues advanced 12% (9% in cc), with growth across all lines of business. Revenues increased $521 million.

Dynamics 365 revenues rose 22% (17% in cc), demonstrating continued share gains and growth across all workloads. Dynamics products and cloud services revenues increased $363 million or 19%.

Operating income for the segment increased $3.6 billion or 21% to $21.0 billion. Gross margin increased $4.4 billion or 18%, driven by growth in Microsoft 365 Commercial cloud, with gross margin percentage increasing slightly on efficiency gains in Microsoft 365 Commercial cloud, partially offset by continued investments in AI infrastructure and growing AI product usage. Operating expenses increased $795 million or 11%, driven by continued investments in research and development compute capacity, AI talent, data, and higher Copilot advertising expenses.

Intelligent Cloud

The Intelligent Cloud segment contributed $34.7 billion in revenues, accounting for 41.8% of total revenues. The segment grew 30% year over year (28% in cc), powered by Azure performance.

Azure and other cloud services revenues surged 40% (39% in cc), driven by demand for services across the platform with continued growth across all workloads. Server products and cloud services revenues increased $7.8 billion or 32%, with server products revenues increasing slightly, primarily driven by higher purchases of licenses running in multi-cloud environments, offset in part by renewals with lower in-period revenue recognition and continued customer shift to cloud.

Enterprise and partner services revenues rose $141 million or 7%, driven by growth in Enterprise Support Services.

Operating income for the segment increased $2.7 billion or 24% to $13.8 billion. Gross margin increased $3.1 billion or 19%, driven by growth in Azure, with gross margin percentage decreasing on continued AI infrastructure investments, offset in part by efficiency gains in Azure. Cost of revenues increased $4.8 billion or 47%, driven by investments in AI infrastructure to support growing customer demand and increased GitHub Copilot usage. Operating expenses increased $459 million or 9%, primarily on continued investments in research and development compute capacity, AI talent and data.

More Personal Computing

The More Personal Computing segment generated $13.2 billion in revenues, representing 15.9% of total revenues. Revenues decreased 1% year over year (down 3% in cc), pressured by lower hardware sales across Devices and Gaming, partially offset by growth in Search advertising.

Windows and Devices revenues decreased $103 million or 2%, with Windows OEM and Devices revenues down 2% (3% in cc), due to a decline in Devices, offset in part by growth in Windows OEM as OEM partners continued to build inventory due to increasing memory pricing.

Gaming revenues decreased $380 million or 7%, with Xbox content and services revenues down 5% (7% in cc) on a prior-year comparable that benefited from strong first-party content performance. Xbox hardware revenues decreased 33% due to lower volume of consoles sold.

Search advertising revenues increased $304 million or 9%. Search advertising revenues, excluding traffic acquisition costs, rose 12% (9% in cc), driven by higher search volume and revenue per search, as well as continued benefit from third-party partnerships.

Operating income for the segment increased $146 million or 4% to $3.7 billion. Gross margin increased $405 million or 6%, driven by growth in Search advertising and Gaming, with gross margin percentage increasing on sales mix shift to higher margin businesses. Cost of revenues decreased $584 million or 10%, primarily on lower hardware sales. Operating expenses increased $259 million or 7%, driven by impairment and other related expenses in the Gaming business and continued investments in R&D, AI talent and data.

MSFT’s AI Platform and Technology Advancements in Q3

Microsoft continued expanding its AI infrastructure and platform capabilities throughout the third quarter. The company added another gigawatt of capacity during the quarter and remains on track to double its overall data center footprint within two years. New data center investments were announced across four continents.

The Maia 200 AI accelerator, which delivers more than 30% improved tokens per dollar compared with the latest silicon in the company's existing fleet, went live in the Iowa and Arizona data centers. The Fairwater data center in Wisconsin came online six weeks ahead of schedule, allowing earlier revenue recognition. Microsoft also delivered a 40% improvement in inference throughput for its most-used Copilot models, driven by software and hardware optimization work.

Across Foundry, over 10,000 customers have used more than one model, 5,000 have used open source models, and the number using both Anthropic and OpenAI models doubled quarter over quarter. Over 300 customers are on track to process more than 1 trillion tokens on Foundry this fiscal year, with token volumes accelerating 30% quarter over quarter. Bayer is using multiple models in Foundry to create an in-house agent platform with more than 20,000 active monthly users.

Microsoft Fabric now serves 35,000 paid customers, up 60% year over year. The amount of data in Fabric OneLake increased nearly 4x year over year, while over 15,000 customers now use both Foundry and Fabric, up 60% year over year. Cosmos DB recorded 50% year-over-year revenue growth, driven by AI app workloads.

Nearly 90% of the Fortune 500 now have agents built with Microsoft's low-code/no-code tools, and the Copilot credit-consumptive offer grew nearly 2x quarter over quarter as customers extended Copilot with custom agents tailored to their workflows. Microsoft also introduced MAI-Transcribe-1, a state-of-the-art speech-to-text model, and MAI-Image 2, both first-party models, and brought MAI models to commercial customers, including Shutterstock and WPP, for the first time through Foundry.

MSFT’s Financial Performance in Q3

Gross profit reached $56.1 billion, up 16% year over year. The gross margin percentage decreased due to continued investments in AI infrastructure and growing AI product usage, offset in part by efficiency gains across the Microsoft Cloud.

Total operating expenses increased $1.5 billion or 9%, primarily driven by continued investments in research and development compute capacity, AI talent and data to support product development across the portfolio. Total company headcount declined year over year. Research and development expenses were $8.9 billion, sales and marketing were $6.8 billion, and general and administrative were $1.9 billion.

Operating income increased $6.4 billion or 20% to $38.4 billion (16% in cc), driven by growth in Productivity and Business Processes and Intelligent Cloud. Net income reached $31.8 billion, up 23% on a GAAP basis and 20% (18% in cc) on a non-GAAP basis.

Revenues, gross margin, and operating income included a favorable foreign currency impact of 3%, 3%, and 4%, respectively. Cost of revenue included an unfavorable foreign currency impact of 2%.

MSFT’s Q3 Capital Expenditure and Infrastructure

Capital expenditures totaled $31.9 billion in the fiscal third quarter, down sequentially due to the normal variability from cloud infrastructure buildouts and the timing of delivery of finance leases. Roughly two-thirds of capex was for short-lived assets, primarily GPUs and CPUs, with the remaining spend for long-lived assets that will support monetization over the next 15 years and beyond. Total finance leases of $4.7 billion in the quarter were primarily for large data center sites. Cash paid for property, plant and equipment was $30.9 billion.

Cash flow from operations totaled $46.7 billion, up 26% year over year, driven by strong cloud billings and collections, partially offset by an increase in operating lease payments. Free cash flow was $15.8 billion, reflecting higher capital expenditures.

As of March 31, 2026, Microsoft maintained total cash, cash equivalents and short-term investments of $78.3 billion compared with $94.6 billion as of June 30, 2025. Long-term debt (including current portion) was $40.3 billion as of March 31, 2026.

Microsoft returned $10.2 billion to shareholders through dividends and share repurchases during the fiscal third quarter.

MSFT’s OpenAI Partnership

The fiscal third quarter reflected net losses from investments in OpenAI of $14 million, which had a minimal impact on diluted earnings per share. This compares with the third quarter of fiscal 2025, when net losses from OpenAI investments decreased net income and diluted earnings per share by $583 million and 8 cents, respectively.

These OpenAI-related impacts have historically created volatility in reported GAAP results, leading the company to provide non-GAAP measures excluding these effects to help investors better understand operational performance.

MSFT’s Q4 Fiscal 2026 Outlook

For the fourth quarter of fiscal 2026, Microsoft expects total company revenues between $86.7 billion and $87.8 billion, suggesting growth of 13% to 15%, with accelerating commercial growth partially offset by the consumer business. Foreign currency is expected to add roughly 1 point to revenue growth in Productivity and Business Processes and More Personal Computing, with no meaningful impact on Intelligent Cloud.

The Productivity and Business Processes segment is expected to generate revenues between $37.0 billion and $37.3 billion, indicating growth of 12% to 13%. Within this segment, Microsoft 365 Commercial cloud revenue growth is projected at 13-14% in cc on a reported basis, or 15–16% on an adjusted basis when normalized for a prior-year comparable that benefited from two points of in-period revenue recognition. Net paid Copilot seat adds are expected to increase sequentially, driving continued ARPU growth. Microsoft 365 Consumer cloud revenue growth is expected in the low-20% range. LinkedIn revenues are expected to grow approximately 10%, while Dynamics 365 revenue growth is expected in the low-double digits.

For the Intelligent Cloud segment, revenues are projected between $37.95 billion and $38.25 billion, suggesting growth of 27% to 28%. Azure and other cloud services revenue growth is expected at 39% to 40% in cc.

For the More Personal Computing segment, revenues are expected in the range of $11.75 billion to $12.25 billion, with hardware revenues declining year over year.

Inclusive of these one-time costs, full-year fiscal 2026 operating margins are expected to be up about 1 point year over year, excluding any impact from investments in OpenAI.

Capital expenditures are expected to increase to more than $40 billion in the fiscal fourth quarter, with the sequential increase including roughly $5 billion from higher component pricing as well as the impact from finance leases. The mix of short-lived assets is expected to remain similar to third-quarter levels. For 2026, Microsoft expects to invest roughly $190 billion in capital expenditures, including approximately $25 billion in impact from higher component pricing.

How Have Estimates Been Moving Since Then?

Since the earnings release, investors have witnessed a downward trend in estimates review.

VGM Scores

At this time, Microsoft has a nice Growth Score of B, a grade with the same score on the momentum front. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending downward for the stock, and the magnitude of these revisions looks promising. Interestingly, Microsoft has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

Performance of an Industry Player

Microsoft belongs to the Zacks Computer - Software industry. Another stock from the same industry, SAP (SAP), has gained 3.5% over the past month. More than a month has passed since the company reported results for the quarter ended March 2026.

SAP reported revenues of $11.18 billion in the last reported quarter, representing a year-over-year change of +17.9%. EPS of $2.01 for the same period compares with $1.51 a year ago.

SAP is expected to post earnings of $2.06 per share for the current quarter, representing a year-over-year change of +21.2%. Over the last 30 days, the Zacks Consensus Estimate remained unchanged.

SAP has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of B.

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