In 2026, Microsoft emerged as one of the underperforming giants among large-cap tech stocks, witnessing its market value dwindle by nearly a fifth over the course of the year. The tech behemoth is slated to unveil its fourth-quarter earnings report for the fiscal year 2026 on July 29. Bank of America analyst Tal Liani remains bullish, reiterating his buy recommendation and setting a target price of $500, while also revising his earnings projections upward for the next two fiscal years.

Liani highlights that Microsoft's current price-to-earnings (P/E) ratio, standing at 19 times, is markedly lower than its five-year average of 29 times. This discrepancy, he argues, suggests that the stock is undervalued, and the upcoming earnings report could potentially mark the beginning of a valuation correction. He specifically underscores the importance of Azure's business growth rate, noting that it needs to hit the 39% to 40% range to effectively propel the stock price upward.

Currently, supply chain constraints pose a significant challenge to Azure's expansion. However, Liani points out that Azure's backlog has nearly doubled over the past year, with roughly a quarter of it anticipated to materialize into actual revenue within the next 12 months.

Investors are keeping a close watch on Microsoft's capital expenditures. The company is projected to pour approximately $190 billion into infrastructure investments in fiscal year 2026, a move that could strain its free cash flow. The market, Liani observes, has limited patience when it comes to seeing returns on AI investments.

Additionally, Microsoft Copilot has surpassed the 20 million paid user milestone. The data from the fourth fiscal quarter will serve as a litmus test for its usage-based billing model and the conversion effectiveness of its AI suite. This, in turn, will validate the monetization potential of Microsoft's AI business, offering crucial insights into its future growth prospects.