Why aren’t Microsoft shares rising after the latest monster news?

While some stocks rise and fall sharply during earnings season, others remain stable. This is basically what Microsoft (NASDAQ:MSFT), as shares rose only slightly more than the broader market (as measured by S&P 500) the day after winnings.

However, when you look at the quarter, some might wonder why the stock didn’t rise more, because it was truly amazing. If it rises higher, this could be an opportunity to get in before other investors realize what they missed.

Microsoft crushed it during the third quarter

Microsoft has become a giant during its long rise to become the biggest company in the world. Although it used to claim the title (alongside Litter) of a 3 billion dollar company, no longer exceeds that threshold. But with these results in mind, you can go back there.

The law of large numbers states that the larger a number is, the closer it is to the population average. When applied to companies and their growth rates, this means that giants like Microsoft should not grow faster than the average of all other companies in the market. But Microsoft goes against this assumption.

In the third quarter (ended March 31), Microsoft’s revenue increased 17%, and earnings per share (EPS) increased 20% year over year. This is much faster than most companies, making these results even more impressive. Furthermore, all of its business segments exceeded expectations presented in the second quarter.

Business segment

Third Quarter Annual Growth Projection

Real growth in the third quarter of the year

Data source: The Motley Fool and Microsoft. YOY = year after year.

But there is a segment of business that is doing the heavy lifting. Of Microsoft’s three business groups, Intelligent Cloud was the exception, with its revenue increasing 21% year over year to $26.7 billion (35% of its total revenue). This was driven by the incredible 31% growth of Microsoft Azure – the best of the three major cloud computing competitors. Why is cloud computing doing so well? It is probably related to artificial intelligence (AI).

AI requires massive data storage and computing power to create the best models. Most companies can’t justify buying their own server to store and process this data, so they rent computing power from Microsoft. This is convenient for the customer as they can scale their usage up or down as needed, or rent more computing capacity when they have a large model to run.

The story continues

As everyone rushes to implement AI in their businesses, Microsoft is seeing a huge increase in demand that is driving Azure and other cloud services that Microsoft provides. Considering Microsoft’s performance, one would expect its shares to rise, but that’s not the case.

Microsoft Stock Was Priced for Perfection

There’s a big reason why Microsoft stock is still pretty stable after earnings. At the start of the quarter, Microsoft needed to post a perfect quarter to avoid falling from its high levels.

MSFT PE Index Chart

Microsoft shares were trading at nearly 39 times earnings less than a month ago, but still trade at a pricey 35 times earnings after the results. This is a premium price reserved only for a few companies that grow quickly or perform at a high level. For reference, AI power Nvidia it currently trades at 34 times forward earnings.

So, in order for Microsoft to avoid a drop in valuation, it needed to record a perfect quarter, which it essentially did. Microsoft still has a premium valuation, so its Q4 execution should be equally perfect.

As a result, I don’t think now is a good time to buy Microsoft stock as there isn’t much room for upside. Instead, investors should shift their focus to other companies that are delivering similar levels of execution, but negotiate for much lower premiums.

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Keithen Drury has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The motley fool has a disclosure policy.

Why aren’t Microsoft shares rising after the latest monster news? was originally published by The Motley Fool

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