Microsoft Had Its Best Quarter in 28 Years. Is it Too Late to Buy the Stock?

Microsoft (NASDAQ:MSFT) has had a challenging past 12 months, as many investors think that artificial intelligence (AI) will displace the services that many software corporations, including Microsoft, provide. However, the tech giant has roared back over the past three months.

During the third quarter of the calendar year, the company's shares gained almost 38%, its best quarterly performance since 1998. It would have been nice to buy Microsoft's shares three months ago, before its third-quarter run, but is there any more upside from current levels? Let's find out.

Image source: The Motley Fool. Image source: The Motley Fool.

Why Microsoft bounced back

Microsoft stock hit a fresh 52-week low around late June. About a month later, the company released its fourth-quarter update for its fiscal year 2026, which ended on June 30. Microsoft's results were excellent, coming up ahead of analyst estimates.

The company's revenue increased by 18% year over year to $90 billion. Microsoft's operating income jumped 18% year over year to $40.6 billion, while its non-GAAP earnings per share came in at $4.74, 23% higher than the year-ago period. Microsoft's strong performance was largely due to its AI and cloud computing businesses, which helped dispel fears that the company's services would eventually lose out to AI.

Quite the opposite is happening. Microsoft is capitalizing on AI by launching tools that cater to its clients. That includes AI agents that automate tasks and boost the productivity of the businesses that depend on Microsoft's tools in their day-to-day activities.

Of course, Microsoft offers plenty of cloud services beyond AI. During the company's fourth quarter, revenue from Microsoft Azure (its cloud computing platform) grew 43% year over year. Azure sales exceeded $100 billion during Microsoft's fiscal year 2026 for the first time. Microsoft's entire cloud business -- including Azure and other segments -- posted $59.3 billion in revenue during the company's Q4, up 27% year over year.

The company ended the quarter with $678 billion in cloud commercial remaining performance obligations, up 84% year over year. So, it isn't just that Microsoft performed well. The company's massive backlog signals sustained demand for its cloud services, and that's great news for the company's medium-term prospects. That's why Microsoft's shares have been rebounding.

What the future may hold

We may be entering the next wave of AI, one that increasingly features agentic systems that can help people and businesses accomplish tasks and work toward goals. Microsoft is in a solid position to capitalize on this, as it has already started launching agents. The company's strengths that have enabled it to become one of the leaders in the cloud computing market will remain hugely important.

These strengths include long-standing relationships with millions of enterprises that use its products every day. Microsoft can integrate new services across the products its clients already use. In fact, as the company pointed out in its fourth-quarter update, Microsoft 365 Copilot -- a suite of AI assistants built into apps like Word and Excel that can automate various tasks -- ended the period with more than 30 million paid seats.

Further, the company has a culture of innovation and generates significant cash flow that can help it stay ahead of rapid technological change, such as the one we are experiencing with AI. Microsoft has already spent a fortune on capex to keep up its AI build-out, and we can expect the company to continue doing so. Some may see that as a bad sign, but Microsoft's financial results strongly suggest that the investment is worth it.

In my view, the company still has significant opportunities in cloud computing and AI, and additional investments are more than justified, especially if they lead to margin gains down the line. Microsoft is increasingly relying on its internally developed Maia series of custom chips, which, as the company has pointed out, leads to better performance per watt when running its MAI foundation AI models.

These are all good reasons Microsoft's prospects look bright, and it's also worth noting that the stock doesn't look prohibitively expensive. Microsoft is trading at 25.1x forward earnings, versus an average of 20.9x for information technology stocks. The company is worth a premium given its outstanding position in AI and cloud computing, wide moat from switching costs, and significant growth prospects. So, even after its recent run, Microsoft stock is a buy.

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.