Microsoft Just Revealed a $677 Billion Reason to Buy Its Stock

Microsoft (NASDAQ:MSFT) hit a fresh 52-week low in June, but the company has outperformed the broader equity market ever since. And by the looks of it, Microsoft's run may continue at least a little while longer. The company recently reported its first-quarter 2027 update, and it was impressive. Microsoft gave investors plenty more reasons to buy the stock. Here's what you need to know.

Image source: The Motley Fool.

Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue »

An excellent quarterly update

Before looking at the numbers, let's review why Microsoft did not perform well through the first half of the year. Some investors think that artificial intelligence (AI) will disrupt the software industry and replace many services offered by software companies, such as Microsoft.

Some recent developments support that view. For instance, a single developer used AI to clone several legacy products in the Microsoft Productivity suite, including Word, Excel, and PowerPoint, as well as products from other major software companies, such as Adobe (NASDAQ:ADBE). These knock-offs weren't fully functional. Still, it's quite a remarkable achievement, and it highlights why some people are worried about Microsoft's future.

The cost of developing software has fallen rapidly thanks to AI, which puts the company at risk. However, so far, Microsoft's financial results suggest that it is doing just fine. In the first quarter of its fiscal year 2027, which ended on Sept. 30, Microsoft's revenue of $92.3 billion increased by 19% year over year. Microsoft's operating income grew 21% year over year to $45.9 billion, while its non-GAAP net earnings per share were $4.89, up 18% year over year.

Microsoft debuted a new reporting structure with two segments this quarter. The first, Agents and Infra, did most of the heavy lifting. Revenue from this unit was $76.8 billion, up 25% year over year. Microsoft Cloud revenue jumped 30% year over year to $63.9 billion, while Azure revenue grew 48% year over year to $33.2 billion. Microsoft's results beat analyst estimates. But is there more growth ahead for the company?

There is more where that came from

One important metric for Microsoft is remaining performance obligations (RPO), or the amount of contracted revenue that hasn't yet been recognized. This metric indicates demand -- or lack thereof -- for the company's services. By the end of the first quarter of fiscal year 2027, Microsoft had $677 billion in RPO within its Agents and Infra business. Note that this figure grew by 73% year over year.

This suggests that AI is not displacing Microsoft's products. Even if the cost of making the kinds of products it has offered for decades has fallen dramatically, there are several advantages for Microsoft. First, it is offering new products that still cost quite a bit.

Microsoft offers various AI services through its cloud business, and supporting these products requires substantial investments in AI infrastructure. Second, reproducing a basic knockoff of some of Microsoft's products isn't the same as replacing these products. Millions of businesses have been using Word, Excel, and other Microsoft software services for decades.

These are deeply integrated into the day-to-day workflow of these companies. It's not so easy to switch to a clone. In other words, Microsoft benefits from a wide moat thanks to high switching costs and deep, long-standing relationships with enterprises. Third, Microsoft is integrating various AI features into its services, making them more powerful and even harder to replace.

There is another important advantage here. Microsoft has direct lines of communication with businesses and access to massive amounts of data, which can help the company determine the best way to improve its services with AI. A single skilled developer cannot easily replicate these advantages, and neither can most major corporations other than Microsoft.

So, despite the threat from AI, Microsoft's business remains strong, and the company is riding a tailwind in AI and cloud computing that may persist for a long time. Microsoft's shares are still worth investing in.

Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe and Microsoft. The Motley Fool recommends the following options: long January 2028 $330 calls on Adobe and short January 2028 $340 calls on Adobe. The Motley Fool has a disclosure policy.