Microsoft’s shares trade at a cheap price-to-earnings (P/E) valuation after its selloff.
If Microsoft beats expectations, the stock could soar back to normal valuation levels.
Microsoft (NASDAQ: MSFT) has been a terrible stock to own so far in 2026; it’s down around 20% so far this year. However, I think things will change after July 29, because that’s when Microsoft reports earnings for its fiscal 2026’s fourth quarter (ended June 30).
I think the bar for Microsoft to report a solid earnings report is relatively low, and if it can keep the status quo from previous earnings reports, it will be perfectly set up to skyrocket for one main reason.
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Image source: Microsoft.
Thanks to the sell-off this year, Microsoft’s valuation has plummeted. It now trades for about 20 times forward earnings.
MSFT PE Ratio (Forward) data by YCharts
This is uncharted territory for Microsoft, as it has historically traded for about 30 times forward earnings. Should Microsoft report a fantastic earnings report and the market deems it worthy of returning to its normal valuation range, that represents 50% upside in the stock — something few big tech companies can say. Furthermore, its current price tag is cheaper than the broader market, as measured by the S&P 500, which trades for 21.7 times forward earnings.
For Q4, Wall Street analysts expect revenue growth of 15%, with earnings per share coming in around $4.24. If Microsoft can exceed those expectations, it may be in a perfect situation to soar after earnings, and it may be set up to do just that because its Q3 results were much better than what’s expected in Q4.
Last quarter, its revenue rose at an 18% year-over-year pace, with diluted earnings per share increasing 23% year over year to $4.27. The bar isn’t all that high for Microsoft, and if it can clear it by a wide margin, the stock could easily deliver double-digit returns following its earnings announcement on July 29.
One item investors will also be watching for is its capital expenditure guidance for fiscal 2027. The market isn’t giving the AI hyperscalers a ton of leash on unnecessary capital expenditures, and with Microsoft spending hundreds of billions on data centers, it’s making a huge investment in the AI realm. But if its cloud computing revenue growth rate continues to accelerate, that will satisfy most investors, as there is a tangible return there because others are paying for its cloud usage, rather than Microsoft using it internally.
Those are some of the key items to watch for, but I’m betting Microsoft will be just fine following earnings, and investors who have held the stock throughout the sell-off will be happier in a few weeks after their earnings announcement is complete.
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Keithen Drury has positions in Microsoft. The Motley Fool has positions in and recommends Microsoft. The Motley Fool has a disclosure policy.
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