Parkev Tatevosian, CFA on $MSFT (Nov 6, 2026)

Prior to the release of the quarterly financial results, Microsoft stock was not on my buy list. You may recall that a few weeks ago I downgraded it because the stock price jumped from $350 to $550 per share between July and October .

This rise in the market price was considered slightly exaggerated and stemmed from excessive enthusiasm on the part of the market.

The company announced its quarterly financial results. The stock is currently trading at $529, slightly down from $550, but we got a lot of new information from Microsoft in this latest quarterly report .

I have used this information to update my fair value estimate for Microsoft stock, incorporate it into my discounted cash flow valuation model , and update my recommendation on what I think should be done with Microsoft now, whether to buy, hold, or sell.

One of the numbers I've been watching closely is the number of remaining performance commitments. These are contracts that Microsoft has signed with customers that will eventually turn into revenue in its cloud computing sector .

This figure, "CRPO", rose by 73 % to reach 677 billion.

Now, there is a lot of concern about this figure because a large proportion of it is allocated to or coming from OpenAI, and there is growing concern that this business is not sustainable; They are losing a lot of money, which may force them to modify their commitments, and perhaps extend, postpone, temporarily suspend, cancel , or in any way, not pay what they agreed to pay Microsoft.

These risks were rising and falling, weren't they ? Market concerns about this relationship between OpenAI and Microsoft have fluctuated between extreme concern and lack of concern.

So, if OpenAI's numbers are in any way close to Anthropic's, that's very positive for Microsoft . The upcoming initial public offering of OpenAI will also be very positive for Microsoft.

This will calm investors' fears somewhat, because we will have more information, and more information always reduces risk, as you can reduce uncertainty in your estimates when you know the actual figures.

The weighted average duration of these contracts is also important. You want to know how long it will take for this backlog of work to turn into revenue, which is 2.3 years, and approximately 30% of it will be recognized as revenue within the next twelve months .

Therefore, approximately 225 billion out of 677 billion will be converted into revenue over the next twelve months. So, this is revenue that the company has already contracted for.

All the company needs is to build the capacity necessary to meet the demand of these customers.

But, it's not all rosy and bright for Microsoft. High prices for memory and processors are causing a decline in the consumer electronics industry. Windows operating system revenue for original equipment manufacturers (OEMs ) came in below expectations, which were already poor , and fell by 27% compared to the same period last year.

To make matters worse, the management team anticipates even weaker demand for computers. Inventory levels are still high, which means that Best Buy, Amazon and other stores that sell these devices have high inventory levels, so they won't order more because they already have more than they need.

In fact, Microsoft expects the decline in this sector to worsen during the next quarter .

Therefore, they have a boom in the artificial intelligence sector , as everything related to artificial intelligence is growing, while all sectors related to physical consumer electronics , such as computer hardware, Windows, and gaming, are suffering as a result of the factors that are causing the boom in demand for artificial intelligence.

Since memory prices are high , and these are the same components that go into manufacturing these consumer electronics, they have had to raise the prices of these electronics. Of course, when you raise prices at a time when demand is not growing, you are only raising them because your costs are increasing, and of course this will lead to a decrease in consumer purchases.

This is already happening, and this situation is likely to continue for at least the next several quarters.

Microsoft shares are now trading at a forward price-to-earnings ratio of 22, which is slightly below the average valuation at which they have been trading according to this metric since early 2024.

I have also updated Microsoft's discounted cash flow model with some revisions, and overall this has resulted in a higher fair value estimate for Microsoft. I now value the company at $587 per share, compared to the current market price of $527.

The stock appears to be slightly undervalued after taking the margin of safety into account. There is a difference of approximately 11.4% between the market price and my estimate of the intrinsic value.

I mentioned that I downgraded Microsoft's stock rating a few weeks ago because the market price had risen significantly, outpacing the company's earnings growth and cash flow. But after what I saw from Microsoft in this recently concluded quarter, I would upgrade the stock to a buy opportunity.

But I don't have a high level of conviction about this buying opportunity. I have a moderate level of conviction on this matter.