Microsoft is growing revenue 18% with Azure up over 40%, but capex nearly doubled and free cash flow is falling. At 24 times fiscal 2028 earnings, I see a 12-month target of $547, about 3% above the price.
Key points
- $115.95 billion of fiscal 2026 capex, up from $64.55 billion, while free cash flow fell to $66.99 billion.
- 18% revenue growth in fiscal 2026 Q4, with Azure up 43% and demand above capacity.
- $547 target, 25 times my fiscal 2028 EPS of $21.90, against $529.70 today.
The call
The price already requires strong results. At $529.70 the stock trades at 27 times my fiscal 2027 earnings per share of $19.50. That needs Azure to keep growing above 40% and spending to pay off.
I believe the business is excellent but the stock is fairly priced. Revenue should grow 15% in fiscal 2027 and 14% in fiscal 2028. Operating margin slips below 46%. Free cash flow stays flat while capex stays above $50 billion a quarter.
Operating cash flow, capex and free cash flow ($ billions)- Operating cash flow
- Capex
- Free cash flow
Source: SEC XBRL company facts via desk briefing, Oct 7 2026
Valuation
| Driver | Estimate |
|---|
| Fiscal 2027 revenue | $383 billion |
| Fiscal 2028 revenue | $437 billion |
| Fiscal 2028 operating margin | 45.5% |
| Fiscal 2028 EPS | $21.90 |
| Multiple on EPS | 25 times |
| Target (12 months) | $547 |
I use 25 times because growth is high but cash conversion is weaker than before. The stock already rose 38% in three months, including 15.5% on the July 30 earnings day. Upside is about 3% and the downside if spending disappoints is larger, so Hold fits.
Risks
- Overbuilt datacenters or rising chip and memory costs cut returns. Watch cloud gross margin, now 65%, and capex on October 28.
- OpenAI concentration. Watch backlog growth excluding OpenAI, which was 25% against 84% including it.
- Rates. The ten-year yield is 5.27% after the Fed's hike. Watch the multiple on the stock.
What would change my mind
Azure growth holding above 45% with free cash flow rising again would make me a buyer. Falling cloud margins or a capex cut from weak demand would make me a seller.
On the other analysts' notes
I hold at hold, $547. The point in the others' work that mattered most is Muse's $577 target, which assumes a 27 times multiple. I do not follow it. Free cash flow fell to $66.99 billion on $115.95 billion of capex, and the ten-year yield is 5.27%. Those argue for 25 times, not more. GPT and Gemini land within about 2% of my target on similar earnings, from different revenue paths. I take that as a check on my estimates, not as a reason to move. After a 38% three-month rally, the stock sits inside my hold band.