Prediction: Microsoft Stock Could Go Parabolic After July 29. Here's Why.

On July 29, Microsoft (NASDAQ: MSFT) reports its fiscal fourth quarter earnings, and that should be a date to circle on your investment calendar.

It could be the date that Microsoft begins its run after struggling for most of 2026. Unlike most of the other "Magnificent Seven" stocks, which have recovered from sell-offs earlier in the year, Microsoft stock has been stuck in reverse, down 20% year to date.

But here's why Microsoft stock is poised to break out after July 29.

Image source: Getty Images.

AI spending paying off

One of the major concerns about Microsoft among investors is its perceived overspending on artificial intelligence (AI). In April, the tech giant upped its capital expenditure forecast to $190 billion for fiscal 2026, which is 61% more than the previous year.

The stock tanked in Microsoft's fiscal third quarter ended March 31 amid concerns about its exclusive partnership with OpenAI and reports of its unprofitability. It didn't help that Microsoft's Azure revenue growth dipped slightly.

But there are strong signs that the investments in AI infrastructure are starting to pay off. Azure, its AI cloud product, saw revenue rise 40% in fiscal Q3, beating estimates. Overall, its cloud revenue rose 29%, which was better than the 25% revenue increase in its Q2. And Microsoft had $627 billion in backlog in Q3 ended March 31, up 99% for the previous year's quarter.

In its outlook, management said Azure growth will be around 40% in Q4, showing some "modest acceleration" in the second half of the year.

The reacceleration is due to the data centers Microsoft is building to expand capacity to handle the high demand. CEO Satya Nadella said, "We are moving aggressively to add capacity aligned to our demand signals we see."

CFO Amy Hood said something similar on the previous quarter's earnings call, stating, "I think it's probably better to think about the Azure guidance that we give as an allocated capacity guide about what we can deliver in Azure revenue." In other words, it is building to meet real demand, not out of hope that demand will come.

Also, Nadella said in the Q3 earnings release that Microsoftʻs AI business has an annual revenue run rate of $37 billion -- up 123% year over year. That's real revenue growth from AI, not speculation, showing that the spending is paying off.

Microsoft's stock is cheap

Another point is that Microsoft recently revised its agreement with OpenAI. With the new agreement, OpenAI is no longer an exclusive AI provider, and Microsoft no longer pays revenue share to OpenAI. The change reduces Microsoft's overall exposure to OpenAI, which should open doors for new revenue opportunities.

Microsoft should also get a revenue bump from updated pricing and packaging for Microsoft software in concert with an approaching new five-year cycle for many of its Office clients.

This all comes at a time when Microsoft stock is historically cheap, trading at just 22 times earnings and 19 times forward earnings. That's below the S&P 500 average.

It's also right around the cheapest Microsoft stock has been since 2018. The only time the price-to-earnings (P/E) ratio was below 22 since 2018 was this past March, when it was 21.

Microsoft is a screaming buy at this valuation, and most analysts agree. Some 95% of analysts rate Microsoft stock as a buy with a median price target of $550 per share. That would suggest 41% upside over the next 12 months.

If Microsoft has a strong Q4 when it reports on July 29 and a robust outlook -- both of which I expect -- it could be the launching pad for a solid run by Microsoft stock.

Dave Kovaleski 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.