Meta and Microsoft offer 40% upside after Q1 earnings beat

Meta Platforms and Microsoft both reported Q1 earnings that topped consensus on April 29, yet both stocks have fallen in 2026 as investors questioned AI spending plans.

"Meta's AI infrastructure is transitioning from a cost center to a monetization engine," analysts at Deutsche Bank said, flipping their view after the company outlined plans to sell compute externally.

Meta posted Q1 revenue of $56.3 billion, up 33% from a year earlier, with an operating margin of 41%. The company guided 2026 capital spending to as much as $145 billion. Microsoft's Q1 results also exceeded estimates, though the stock has declined alongside Meta as investors weighed the return on AI investment. Meta trades at roughly 21 times trailing earnings and 19 times forward, a discount to the software sector despite revenue growth above 30%.

The selloff in both names means investors can buy two of the largest US technology companies at compressed multiples while their core businesses continue generating strong cash flows. For Meta, the path to re-rating hinges on whether its compute-as-a-service pivot lands anchor tenants. For Microsoft, the catalyst is Azure acceleration and enterprise AI adoption. Either scenario supports current prices without requiring AI revenue to materialize immediately.

Two Earnings Beats, Two Selloffs

Meta's Q1 results showed ad revenue rising 33% to $56.3 billion, with ad impressions up 19% and price per ad up 12%. The company's core advertising business generated $200.97 billion in 2025 at a 41.4% operating margin. Yet shares trade at $593, below both the 50-day moving average of $605 and the 200-day average of $646.

Microsoft's Q1 also topped estimates, driven by Azure cloud growth and enterprise software demand. The stock has declined in 2026 despite the beat, mirroring the broader Mag 7 selloff that has hit names with large AI capital expenditure programs. "Meta's core business alone supports the current stock price," analysts at Morgan Stanley said, upgrading their view on the stock.

Valuation Compression Creates an Entry Point

Meta carries 57 Buy ratings, 6 Hold, and 0 Sell from analysts, with a consensus price target of $828.17 implying roughly 40% upside. The stock trades at 19 times forward earnings, cheaper than the broader software complex despite 30%-plus revenue growth.

Microsoft trades at a similar discount to its historical average, reflecting market skepticism about near-term AI monetization. Both companies generate tens of billions in annual free cash flow from their core businesses, providing a floor beneath current valuations.

What's at Stake

The bull case for both stocks rests on simple math: the core businesses are growing and profitable enough to support current prices, while AI infrastructure spending offers upside optionality. For Meta, a cloud business renting compute capacity could add a new revenue stream. For Microsoft, Azure's AI workload growth could accelerate cloud revenue.

The risk is that AI spending continues to outpace returns, pressuring margins and free cash flow. Meta's depreciation and amortization of $18.6 billion trails its $69.7 billion in 2025 capex by a wide margin, meaning future earnings will absorb a rising drag. Microsoft faces a similar dynamic.

For investors, the current setup offers a rare combination: two dominant platform businesses trading below their historical multiples while their core earnings continue compounding. The next catalyst for Meta is the Q2 earnings report, with revenue guided to $58 billion to $61 billion. For Microsoft, the July quarter results will show whether Azure AI workloads are accelerating. Either outcome supports the thesis that these stocks are priced for disappointment, not for the earnings power they actually deliver.

This article is for informational purposes only and does not constitute investment advice.