Microsoft’s (NAS: MSFT) fourth-quarter results topped the high end of guidance. Revenue increased 18% year over year to $76.4 billion, compared with the high end of guidance of $74.3 billion, while operating margin was 44.9%, compared with the high end of guidance at 43.8%.

Why it matters: Results are strong from any angle, with meaningful upside to our estimates on both the top and bottom lines. Revenue for all segments checked in above the high end of guidance. Critically, we see very impressive performance within Azure, in both traditional and AI workloads.

  • In our view, near-term demand indicators are robust. Commercial bookings grew a stout 30% year over year in constant currency based on surging Azure commitments from OpenAI and other large deals. Remaining performance obligations increased 37% year over year to $368 billion.
  • Demand for Azure AI services is surging, which is clearly a long-term positive. While Azure remains capacity-constrained, both traditional and AI workloads were strong. Azure growth was 39% in constant currency for the quarter and easily topped guidance of 34%-35%.

The bottom line: We raise our fair value estimate for wide-moat Microsoft to $600 per share, from $505 previously, on strong results and a bullish outlook, moving our near-term growth estimates higher and profitability slightly higher throughout our forecast. The stock remains one of our top picks.

Coming up: First-quarter guidance is better than both our and FactSet consensus estimates, including $75.25 billion in revenue, 46.6% operating margin, and $3.65 in EPS at the midpoints. For fiscal 2026, the firm expects double-digit revenue growth and relatively flat operating margins versus 2025.

Big picture: We see results reinforcing our long-term thesis, which centers on the expansion of hybrid cloud environments, the proliferation of artificial intelligence, and Azure. We center our growth estimates around Azure, Microsoft 365 E5 migration, and traction with the Power Platform.

Microsoft is well positioned in secular growth drivers, including AI and public cloud

Microsoft is one of three public cloud providers that can deliver a wide variety of PaaS/IaaS solutions at scale. Based on its investment in OpenAI, the company has also emerged as a leader in AI. Microsoft has also enjoyed great success in upselling users on higher priced Office 365 versions, notably to include advanced telephony features. These factors have combined to drive a more focused company that offers impressive revenue growth with high and expanding margins and deepening ties with customers.

We believe that Azure is the centerpiece of the new Microsoft. Even though we estimate it is already an approximately $75 billion business, it is still growing at approximately 30% annually. Azure has several distinct advantages, including that it offers customers a painless way to experiment and move select workloads to the cloud creating seamless hybrid cloud environments. Since existing customers remain in the same Microsoft environment, applications and data are easily moved from on-premises to the cloud. Microsoft can also leverage its massive installed base of all Microsoft solutions as a touch point for an Azure move. Azure also is an excellent launching point for secular trends in AI, business intelligence and Internet of Things, as it continues to launch new services centered around these broad themes.

Microsoft is also shifting its traditional on-premises products to become cloud-based SaaS solutions. Critical applications include LinkedIn, Office 365, Dynamics 365, and the Power platform, with these moves now beyond the halfway point and no longer a financial drag. Office 365 retains its virtual monopoly in office productivity software, which we do not expect to change in the foreseeable future. Lastly, the company is also pushing its gaming business increasingly toward recurring revenues and residing in the cloud. We believe that customers will continue to drive the transition from on-premises to cloud solutions, and revenue growth will remain robust with margins continuing to improve for the next several years.

Bulls say

  • Public cloud is widely considered to be the future of enterprise computing, and Azure is a leading service that benefits the evolution to first to hybrid environments, and then ultimately to public cloud environments.
  • Microsoft 365 continues to benefit from upselling into higher-priced stock-keeping units as customers are willing to pay up for better security and Teams Phone, which should continue over the next several years.
  • Microsoft has monopoly like positions in various areas (OS, Office) that serve as cash cows to help drive Azure growth.

Bears say

  • Momentum is slowing in the ongoing shift to subscriptions, particularly in Office, which is generally considered a mature product.
  • Microsoft lacks a meaningful mobile presence.
  • Microsoft is not the top player in its key sources of growth, notably Azure and Dynamics.

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Terms used in this article

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating:An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, readthis article by Mark LaMonica.