TipRanks Smart Value #54: Cloud Compounder

Shrilekha Pethe on March 17, 2026

Dear Investors,

Welcome to the 54^th edition of our TipRanks Smart Value Newsletter!

This Week’s Top Value Pick: Microsoft (MSFT)

Microsoft Corp. (MSFT) is a U.S.-based technology company that develops and sells software, cloud services, and hardware products for businesses and consumers worldwide. Its operations span productivity software, operating systems, cloud computing, enterprise solutions, and gaming through platforms such as Microsoft 365, Windows, and Microsoft Azure. MSFT is one of the world’s largest technology companies and a leading provider of enterprise software and cloud infrastructure.

Platform Evolution

Microsoft traces its origins to 1975, when Bill Gates and Paul Allen founded the company to develop software for early personal computers. Microsoft’s first breakthrough came with the development of the MS-DOS operating system for IBM personal computers in the early 1980s. This partnership helped establish Microsoft as a leading software provider as the personal computer market took off.

The company’s growth accelerated in the late 1980s and 1990s with the launch of the Microsoft Windows platform. Windows introduced a graphical user interface that made personal computers easier to use, and its widespread adoption by PC manufacturers allowed Microsoft to dominate the desktop operating system market. During this period, the company also introduced Microsoft Office, which combined applications such as Word, Excel, and PowerPoint into a unified productivity platform widely used by businesses and consumers. The strong global demand for Windows and Office created powerful licensing revenue streams that supported decades of revenue and earnings growth.

In the 2000s, Microsoft expanded beyond traditional software into enterprise infrastructure and consumer technologies. The company launched the Xbox gaming platform, introduced server and database products for corporate customers, and invested heavily in developer tools and enterprise software. These initiatives broadened Microsoft’s addressable market and strengthened its position in enterprise IT.

Not all expansion efforts were successful. In 2015, Microsoft wrote down about $7.6 billion related to its acquisition of the mobile phone business of Nokia, effectively acknowledging the failure of its attempt to compete in smartphone hardware. The following year, the company sold the remaining Nokia feature phone assets, fully exiting the consumer handset market.

A major strategic transformation began in the 2010s as Microsoft shifted toward cloud computing and subscription-based services. The rapid expansion of Microsoft Azure positioned the company as a major competitor in the fast-growing cloud infrastructure market. At the same time, the transition of Office to subscription-based offerings such as Microsoft 365 created recurring revenue streams and strengthened the company’s long-term growth profile.

Acquisitions also played an important role in expanding Microsoft’s ecosystem. In 2016, the company acquired LinkedIn, gaining access to one of the world’s largest professional networks and integrating its data and services with enterprise products such as Outlook and Microsoft 365. Two years later, Microsoft purchased GitHub, strengthening its relationship with global developer communities and expanding its presence in open-source software development.

Microsoft continued expanding its capabilities through additional acquisitions in artificial intelligence, healthcare technology, and gaming. In 2021, the company purchased ZeniMax Media, bringing several well-known gaming franchises into its portfolio and expanding content for its subscription gaming service, Xbox Game Pass. In 2022, Microsoft acquired Nuance Communications, enhancing its cloud-based healthcare and enterprise AI solutions.

The company further expanded its gaming business in 2023 with the acquisition of Activision Blizzard, the largest deal in Microsoft’s history. The transaction added major franchises such as ‘Call of Duty,’ ‘Warcraft,’ ‘Diablo,’ ‘Overwatch,’ and ‘Candy Crush,’ strengthening Microsoft’s position in the global gaming industry.

More recently, Microsoft has deepened its focus on artificial intelligence. The company maintains a strategic partnership and investment relationship with OpenAI, enabling it to integrate advanced AI models into products such as Azure and Microsoft 365. In 2024, Microsoft also expanded its AI capabilities through an unusual arrangement with Inflection AI, hiring much of the startup’s core team and acquiring key technology assets rather than completing a traditional acquisition.

Taken together, these developments illustrate Microsoft’s evolution from a personal computer software provider into a global technology platform company centered on cloud computing, enterprise software, artificial intelligence, and digital ecosystems. Over time, the company has completed more than 200 acquisitions across areas such as cybersecurity, developer tools, enterprise collaboration, gaming, and cloud infrastructure, reinforcing its position as one of the world’s leading technology companies.

Ecosystem Engine

Microsoft operates a diversified technology platform built around software, cloud infrastructure, digital services, and connected ecosystems. The company generates revenue through software licensing, cloud-based subscriptions, digital content, advertising, and hardware sales.

Microsoft organizes its operations into three primary segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. Together, these segments form an integrated ecosystem designed to serve enterprise customers, developers, and consumers.

The Productivity and Business Processes segment focuses on software and cloud services that help organizations communicate, collaborate, and manage business operations. Its flagship offering is Microsoft 365, a subscription-based platform that provides access to widely used productivity applications such as Word, Excel, Outlook, and Teams, along with security, compliance, and analytics tools. The segment also includes LinkedIn, which generates revenue through recruitment solutions, marketing services, and premium subscriptions, and Microsoft Dynamics 365, a cloud-based suite of customer relationship management and enterprise resource planning applications used by businesses to manage sales, operations, and customer data.

The Intelligent Cloud segment centers on infrastructure and platform services that power modern computing environments. Its core offering is Microsoft Azure, which provides computing power, storage, data analytics, and artificial intelligence tools to businesses and developers. Azure allows organizations to run applications, process large datasets, and build AI-driven services without maintaining their own physical infrastructure. The segment also includes enterprise software such as SQL Server and Windows Server, along with technical support services that help organizations deploy and manage large-scale digital systems.

The More Personal Computing segment connects Microsoft’s software ecosystem with consumer devices and digital services. It includes licensing revenue from the Windows operating system sold to PC manufacturers; hardware such as Surface devices, gaming hardware, and content from the Xbox ecosystem; and advertising revenue generated through search platforms such as Bing.

Across these businesses, Microsoft increasingly emphasizes cloud-based subscriptions and usage-driven services. Demand for Microsoft Cloud products – including Azure, Microsoft 365, LinkedIn, and Dynamics – has been a major driver of revenue growth and operating income expansion. These recurring revenue streams, supported by a global enterprise customer base and deep software integration across products, form the foundation of Microsoft’s long-term earnings and cash-flow generation.

AI Stack

The company’s CEO Satya Nadella has increasingly framed Microsoft’s strategy around the growing role of artificial intelligence in improving productivity across the global economy. In his view, widespread adoption of AI could gradually increase economic output in a way similar to earlier waves of computing and the internet. Within this environment, Microsoft aims to position itself as a “full-stack” AI provider, delivering the infrastructure, platforms, and applications needed to build and deploy AI systems.

A central element of Microsoft’s growth strategy is the continued expansion of its cloud infrastructure, particularly the platform built around Microsoft Azure. Rising demand for artificial intelligence applications has increased the need for large-scale computing capacity, prompting Microsoft to invest heavily in new data centers that function as massive hubs to process and store data powering AI-driven services for businesses and consumers. To improve efficiency and control infrastructure costs, the company is also developing specialized processors optimized for cloud and AI workloads. Custom chips such as the Maia accelerator and the Cobalt server processor enhance performance while reducing operating costs, and designing its own silicon allows Microsoft to better optimize hardware and software together, potentially improving margins as AI workloads scale.

The company is expanding its global cloud footprint to meet enterprise and government requirements for data storage within national boundaries, supporting public, private, and sovereign cloud deployments across multiple regions. These infrastructure investments strengthen Azure’s competitive position and provide the foundation for the growing adoption of AI services across Microsoft’s software ecosystem.

Alongside infrastructure, Microsoft is building a platform for AI-powered software agents capable of interpreting instructions, gathering information, and completing tasks with minimal manual input. Through Azure and its development platform Azure AI Foundry, organizations can build and deploy custom AI applications combining advanced models, enterprise data, and governance tools. A key advantage is the multi-model approach, allowing customers to use AI models from multiple providers, including OpenAI and Anthropic. Adoption of these tools has expanded rapidly. More than 1,500 customers are already using Azure AI Foundry with OpenAI and Anthropic models. This flexibility has helped drive growing enterprise adoption of Azure-based AI services.

Microsoft Fabric connects corporate data with AI systems, enabling companies to analyze large datasets and automate business processes. This service has surpassed $2 billion in annual recurring revenue and serves more than 31,000 customers. Low-code tools such as Copilot Studio and Agent Builder allow employees without advanced programming expertise to create automated workflows and AI agents.

AI capabilities are embedded directly into Microsoft’s existing software platforms. Products such as Microsoft 365 Copilot integrate AI assistance into widely used applications, including Word, Excel, Outlook, and Teams, enabling users to draft documents, analyze spreadsheets, summarize communications, and automate workflows. Adoption has expanded rapidly, with roughly 15 million paid seats and seat additions growing about 160% year-over-year, while daily active users have increased roughly tenfold. Similarly, GitHub Copilot supports AI-assisted coding and now has approximately 4.7 million paid subscribers, reflecting roughly 75% year-over-year growth, and continues to expand with tools that allow developers to build AI-driven coding agents.

AI adoption extends across enterprise workflows, increasing demand for cloud computing and reinforcing Azure’s role as a key engine of long-term revenue growth. According to Nadella, AI is already generating measurable impact within platforms such as GitHub, Excel, OneDrive, and SharePoint, with a growing portion of content created or assisted by AI. The Work IQ platform connects data across Microsoft 365 applications, enabling AI systems to analyze relationships and automate complex workflows. This “network effect of intelligence” strengthens customer retention by increasing the value of data stored within Microsoft’s ecosystem. These developments demonstrate how deeply integrated AI capabilities drive higher engagement, recurring revenue, and durable competitive advantages, supporting sustained growth in Microsoft’s productivity and cloud businesses.

Cloud Surge

Over the past three years, Microsoft has delivered steady and increasingly profitable growth, with revenue and EPS rising at a CAGR of 14.4% and 21.1%, respectively. This expansion has been driven primarily by the rapid scaling of its cloud platform, particularly Microsoft Azure, as enterprises continue shifting workloads to the cloud and increasing investments in AI infrastructure. At the same time, subscription-based offerings such as Microsoft 365 and enterprise applications like Dynamics 365 have strengthened recurring revenue, while operating leverage and ongoing share repurchases have amplified earnings growth.

This momentum carried into the company’s fiscal second quarter, where Microsoft reported strong results across its core businesses. Total revenue reached $81.3 billion, up 17% year over year (15% in constant currency), supported by continued demand for cloud computing, enterprise software, and AI-driven services. A key highlight was the performance of Microsoft Cloud, where revenue rose to $51.5 billion, marking the first time it surpassed the $50 billion threshold and accounting for approximately 58% of total revenue, with growth of 26% year over year.

Despite intensifying investment in AI infrastructure, profitability remained resilient. Gross margin came in at 68%, slightly lower than the prior year due to higher spending on computing capacity. However, this pressure was partially offset by efficiency gains in Azure and Microsoft 365, along with a favorable mix shift toward higher-margin cloud services. Operating income increased 21% year over year, resulting in a strong operating margin of 47%, while adjusted earnings per share rose 24% to $4.14, exceeding expectations after accounting for the impact of Microsoft’s investment relationship with OpenAI.

To support long-term demand, Microsoft continued to invest aggressively in its infrastructure footprint. Capital expenditures totaled $37.5 billion during the quarter, with roughly two-thirds allocated to short-lived assets such as GPUs and CPUs used in data centers. Cash spending on property and equipment reached $29.9 billion, underscoring the scale of its commitment to expanding AI and cloud capacity.

Demand across enterprise services remained exceptionally strong. Commercial bookings surged 230% year over year, driven by large, multi-year cloud agreements, including partnerships involving OpenAI and Anthropic, alongside steady growth in core subscription products. This momentum pushed commercial remaining performance obligations to $625 billion, more than doubling from the prior year, while the average contract duration extended to approximately 2.5 years. Notably, around 45% of this backlog is tied to OpenAI-related commitments.

At the segment level, growth was broad-based. The Productivity and Business Processes segment generated $34.1 billion in revenue, up 16%, supported by continued adoption of Microsoft 365 and higher average revenue per user driven by premium offerings such as E5 and AI-powered Copilot features. Paid Microsoft 365 seats surpassed 450 million, while Dynamics 365 revenue increased 19%. The Intelligent Cloud segment delivered $32.9 billion in revenue, rising 29%, with Azure revenue growing 39% as enterprise demand for cloud and AI services continued to outpace available supply. In contrast, the More Personal Computing segment generated $14.3 billion in revenue, down 3%, as growth in Windows OEM revenue and search advertising was offset by a decline in gaming revenue due to content timing.

Operating expenses increased about 5% year over year in constant currency terms, primarily reflecting higher research and development spending on advanced computing infrastructure and engineering talent. One notable accounting factor during the quarter was Microsoft’s investment relationship with OpenAI. Under equity-method accounting, related gains significantly boosted the “other income and expense” line on a GAAP basis, though adjusting for this impact provides a clearer picture of underlying operating performance.

From a returns perspective, Microsoft continues to rank among the industry leaders, with its ROE, ROA, and ROIC placing within the top tier of peers.

Looking ahead, management expects this growth trajectory to continue. For the upcoming quarter, Microsoft guided to revenue of approximately $81.2 billion at the midpoint, implying growth of 15% to 17% year over year, with foreign exchange providing a modest tailwind. Microsoft Cloud gross margin is projected at around 65%, reflecting continued investment in AI infrastructure. Within this, Azure is expected to maintain strong momentum, with revenue growth of roughly 37% to 38% in constant currency.

Capital expenditures are expected to decline sequentially as the pace of data center expansion moderates following earlier buildouts, although the overall mix of spending, particularly on short-lived compute assets, will remain broadly consistent. For fiscal 2026, management anticipates a slight improvement in operating margins, supported by disciplined spending and a favorable product mix that includes Windows licensing and on-premises server software. At the same time, management highlighted memory pricing as an area to watch, given its potential impact on costs related to devices, servers, and data center investments.

Durable Discount

Over the past year, Microsoft shares have delivered a modest gain of approximately 3%, as strong momentum in AI-related stocks reversed in the final months of 2025 due to rising concerns over heavy AI capex and its monetization timelines, as well as market fears over AI’s disruption of software. As a result, shares pulled back to around $395 by mid-March 2026, roughly 27% below their peak.

Despite this recent weakness, analysts remain bullish about MSFT’s long-term outlook, supported by the company’s strong financial foundation. High margins reflect durable scale advantages in software and cloud services, while a solid balance sheet and efficient capital allocation provide flexibility to invest in AI infrastructure, pursue acquisitions, and sustain shareholder returns. At the same time, continued growth in Azure, Microsoft Cloud, and AI-driven offerings such as Copilot reinforces recurring revenue visibility and long-term expansion potential.

This company’s strong fundamentals underpins a constructive forward outlook. Street consensus implies roughly 49% upside from the current share price, while more bullish forecasts suggest potential gains of up to 70%. The wide dispersion in price targets mainly reflects different assumptions about the pace and scale of its AI-driven growth and cloud monetization over the next several years. A discounted cash-flow analysis supports this view, indicating that Microsoft’s shares may be trading at an estimated 17% discount to their intrinsic value.

Against this backdrop, the recent pullback has pushed Microsoft’s valuation meaningfully below its historical norms. Based on several key metrics, including non-GAAP trailing and forward P/E, forward EV/EBITDA, price-to-book, and forward price-to-cash-flow multiples, the stock is currently trading at more than a 20% discount to its historical averages. This suggests that a considerable portion of the market’s recent caution around large-cap technology stocks may already be reflected in the share price.

A comparison with major peers such as Amazon, Alphabet, Oracle, and Salesforce further reinforces this view. Microsoft trades in the low-to-moderate range across several measures, including trailing and forward P/E, forward EV/EBITDA, and forward price-to-book and price-to-cash-flow ratios, despite delivering best-in-class profitability. The company leads the peer group in EBITDA and net margins and generates a strong return on assets, while also posting one of the strongest EBITDA growth profiles, second only to Oracle, which is expanding more aggressively from a lower base. However, the company trades at a premium compared to its peers on the basis of the forward price-to-sales ratio, largely reflecting Microsoft’s superior profitability and cash flow conversion, as investors are willing to pay more for a business that consistently translates revenue into operating income and free cash flow.

The company has consistently paid dividends since 2004 and has increased them for the past 22 years. Over the past decade, the dividend has grown at a CAGR of about 10.1%. Based on adjusted earnings, the company distributes roughly 22% of its profits to shareholders. For the most recent quarter, Microsoft announced a quarterly dividend of $0.91 per share payable on June 11, 2026, to shareholders of record on May 21. In the fiscal second quarter, the company returned $12.7 billion to shareholders, up 32%, with $6.8 billion in dividends and $6 billion in stock buybacks.

In addition to dividends, Microsoft continues to return capital through share repurchases. The company completed its previous $60 billion share repurchase program, approved in September 2021, in April 2025. It subsequently launched a new $60 billion authorization, approved in September 2024, which began in April 2025 and has no expiration date. As of December 31, 2025, approximately $47.4 billion remained available under this program.

Investing Takeaway

For value-oriented investors, Microsoft presents a compelling blend of quality and relative mispricing. The recent pullback has brought MSFT under its historical valuation range, even as the business continues to deliver strong profitability, consistent cash flow, and durable competitive advantages across cloud and software. Unlike many high-growth peers, Microsoft combines scale, recurring revenue, and industry-leading margins, which support resilient earnings through cycles. While near-term concerns around AI spending and monetization have weighed on sentiment, they do not appear to undermine the company’s long-term earnings power. With disciplined capital allocation, steady shareholder returns, and a deeply embedded enterprise ecosystem, Microsoft offers a rare opportunity to gain exposure to structural growth at a more reasonable valuation.

Category: Smart Value