Over the last few years, just a handful of companies have come to dominate the market. Eleven stocks now trade on U.S. exchanges with market caps exceeding $1 trillion, as of this writing. Analysts expect the trend of the big getting bigger to continue in 2026, with price targets for most of the members of the trillion-dollar club implying well above-average returns.
But one stock stands out among the rest. The median analyst price target for this titan is about 55% above the current stock price following a recent sell-off. Here's why it makes sense to stay bullish on Microsoft (MSFT 0.73%).
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What's weighing on Microsoft
Shares of Microsoft are down 25% since the end of October due to a multitude of events changing investor sentiment on the stock.
First, it's spending heavily on Azure, its cloud computing segment. The company spent $34.9 billion on capital expenditures in its first quarter and $37.5 billion in the second quarter. That's a significant step-up in spending from the first half of fiscal 2025, but it's not out of line with what other hyperscale cloud computing providers are spending this year.
Investors may be concerned that the step-up in spending hasn't led to a meaningful acceleration in Azure revenue. Azure is already growing quickly, up 39% in the most recent quarter. Growth would have been higher, but Microsoft remains capacity-constrained, and it strategically shifted some of its compute to its own software to grow its own AI efforts.
NASDAQ: MSFT
Key Data Points
Moreover, investors might be worried about how generative AI platforms could disrupt Microsoft's enterprise software business. The entire software sector has sold off since the start of the year, and Microsoft hasn't been able to avoid it. But with its Windows operating system and Microsoft 365 suite sitting at the center of many enterprises' operations, it's hard to see AI displacing it. High-margin software remains a key cash cow for Microsoft, so any threat to the business could threaten its ability to invest in AI compute.
Most recently, Microsoft's stock may be facing pressure after OpenAI revised its long-term spending plans. After signing contracts to spend around $1.4 trillion over the next eight years, OpenAI now plans to spend $600 billion on compute by 2030. The AI lab notably has a $250 billion deal with Microsoft for compute. Additionally, Microsoft owns 27% of OpenAI, so its financial results can have a meaningful impact on how investors value Microsoft.
Despite those pressures, Microsoft looks poised to continue delivering strong operating results in 2026 and beyond, and the stock is a bargain right now.
The dual AI growth engine
Microsoft is benefiting from generative AI development across both its cloud computing segment and its enterprise software business. The latter grew 14% on a constant-currency basis last quarter, fueled by the adoption of its Copilot AI assistant. It now counts over 15 million Copilot users across its Microsoft 365 corporate customers. Considering it has over 400 million total users across the enterprise and consumer versions of the software, there's still plenty of room for that to grow.
Azure remains the biggest growth driver for Microsoft. Its revenue climbed 39% last quarter, and it's on pace to surpass a $100 billion run rate this year.
Combined, Microsoft has a backlog of $625 billion in remaining performance obligations across its cloud computing contracts and enterprise software deals. Of that, $250 billion came from the OpenAI deal struck in October, but Microsoft is seeing fairly strong growth even without OpenAI's commitment. Management noted that its backlog would have grown 28% year over year without the OpenAI contract. Additionally, 25% of that $625 billion will be recognized over the next year, an amount 39% higher than at the start of 2025.
As a result, Microsoft should be able to produce solid revenue growth. And with higher pricing for Microsoft 365 contracts with Copilot and operating efficiencies gained as Azure scales, it should be able to deliver even better earnings-per-share (EPS) growth. Indeed, analysts expect EPS growth to accelerate over the next few years from a mid-teens level to the 20% range in 2028. However, shares now trade for just 23 times forward earnings expectations. That's severely undervalued based on the outlook for Microsoft, and it's no wonder analysts see more than 50% upside to the stock on average.
