Key Points
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Microsoft’s cloud business performed well during its latest period.
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The company’s massive backlog in this segment points toward sustained demand.
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Microsoft is already bouncing back from recent woes, but it may still be just getting started.
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Microsoft (NASDAQ: MSFT) has not performed well this year. Investors are worried that artificial intelligence (AI) will replace many of the company’s services, a sentiment that has put downward pressure on much of the software industry. Meanwhile, the company’s heavy investments in AI may lead to lower profits and margins, or so the argument goes. However, Microsoft proved some doubters wrong with its latest earnings report, for the fourth quarter of its fiscal year 2026, which ended on June 30.
The company’s revenue increased by a healthy 18% year over year to $90 billion, and even with massive AI investments, adjusted earnings per share climbed 23% year over year to $4.74. Microsoft’s stock soared by 15% following its quarterly update, but there is one key reason — or several hundred billion — why there may be more upside ahead. Here’s what investors need to know.
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Microsoft Cloud for the win
Microsoft’s cloud computing business was, once again, the star of the show. Microsoft Cloud’s sales jumped 27% year over year, while Azure revenue increased by 43%. This segment should continue driving growth for the foreseeable future. How do we know that? The company reported a cloud backlog of $678 billion as of the end of the quarter, up 84% year over year. This provides the tech leader with significant visibility into sustained demand and growth in its cloud business.
Also, Microsoft’s AI-related investments are clearly having a positive impact on the business, even beyond driving meaningful cloud growth. Consider Microsoft Copilot, an AI assistant integrated across the company’s apps and productivity suite that helps users automate tasks and improve productivity. Microsoft said that Microsoft 365 Copilot has 30 million paid seats (or active paid subscriptions), with net paid subscription adds more than doubling quarter over quarter.
This provides further evidence that, rather than being replaced by AI, Microsoft is evolving with the technology by launching AI-powered services to make its customers’ lives easier, and they are buying what the company is selling. Microsoft is dispelling some of the fears investors have had recently and showing that its long-term investment thesis remains strong. We haven’t even touched on other aspects of the business, including its reliable income program and rock-solid balance sheet.
Despite all that, Microsoft’s shares are still in the red this year, down 2% year to date as of writing. My view is that even with the massive post-earnings surge, there is still plenty of upside potential, given the tech leader’s strong position in cloud computing, innovative abilities, significant free cash flow, and other aspects of the business that will enable it to pursue lucrative long-term opportunities.
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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
