Earnings season is near, and it's time to start looking at what stocks could be primed for a big move following earnings announcements. One stock that has fared poorly since its last announcement is Microsoft (MSFT 0.73%). Since it announced fiscal 2026 first-quarter earnings (ending Sept. 30) on Oct. 29, its stock price has declined nearly 14%.
It's rare to see a big tech company as successful as Microsoft be down so much from its recent highs, but that could open up a buying opportunity for long-term investors. Microsoft announces fiscal 2026 Q2 earnings (ending Dec. 31) on Jan. 28.
Is now the time to buy, or should long-term investors wait until after? Let's find out.
Image source: Getty Images.
Microsoft's stock success boils down to a few key areas
Microsoft oversees a lot of different business segments. It has its Office computer products that many utilize on a daily basis, alongside other software tools and hardware products that businesses need to operate on a daily basis. It owns the Xbox video game system and the Activision-Blizzard gaming studio (along with multiple other studios), and also operatesthe online professional business social media site LinkedIn. While these are all components of Microsoft's overall picture, what investors of late really want to know is how Microsoft is doing with artificial intelligence (AI).
While its Copilot product within the Office suite of software products has become popular for its AI capabilities, the star of the show for Microsoft's AI efforts is its cloud computing segment, Azure. Azure has become one of the top cloud computing options to build AI applications on, mainly because it gives users access to multiple generative AI models. While Microsoft has a significant ownership stake in the current generative AI leader, OpenAI (which makes ChatGPT), it also gives users access to other AI models like X's Grok, Meta Platforms' Llama, and Anthropic's Claude. This has led to incredible Azure growth, with revenue rising at a 40% year-over-year pace in Q1.
NASDAQ: MSFT
Key Data Points
If Azure continues to show strength alongside the rest of the business, I think the stock could go higher. However, if this next earnings report implies that it's weak for some reason, don't be surprised to see the stock price decline a few percentage points.
The reality is, Microsoft's stock decline wasn't necessarily a bad thing, as the stock's valuation got a bit overheated.
Microsoft's valuation is at a reasonable level now
Prior to its decline starting in late October, Microsoft traded for more than 32 times forward earnings. Most big tech stocks trade around 30 times forward earnings, so this was a bit pricey for the results Microsoft was delivering.
Data by YCharts.
However, 28.5 times forward earnings may be a great entry point for the stock, as it still provides a decent discount from the 31.5 times forward earnings level that Microsoft's stock has averaged over the past five years.
If Microsoft's fiscal 2026 second-quarter results are solid, I won't be surprised to see the stock pop a bit. It looks like a solid deal right now, and I think long-term investors should take advantage of it.
