Microsoft Stock Is Down More Than 10% In 3 Months. Time to Buy the Dip?
- - Microsoft Stock Is Down More Than 10% In 3 Months. Time to Buy the Dip?
Daniel Sparks, The Motley FoolJanuary 25, 2026 at 5:41 AM
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Key Points -
The software giant's "Azure and other cloud services" revenue grew 40% last quarter, with demand exceeding supply.
Microsoft's commercial backlog soared, driven primarily by Azure commitments.
Capital expenditures were $34.9 billion last quarter, and management said spending will rise sequentially.
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It's a timely moment to look at Microsoft (NASDAQ: MSFT) stock. Not only is it down more than 10% in three months, but it reports fiscal second-quarter results after market close on Wednesday.
Going into the report, we know demand is surging for the company's cloud-computing business, Azure. So this part of the software giant's business should report another spectacular quarter. But we have less clarity about how quickly the company's capital expenditures will grow and whether its backlog will continue to expand at the extraordinary rate it was in fiscal Q1.
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While we'll have to wait until the update to get clarity on these items, do we have enough information in the meantime to know whether the stock is a buy now? Or is waiting for more information from the earnings report before making a decision the better move?
Servers in a data center.
Image source: Getty Images.
Demand for Azure is surging
As is the case for many tech companies during the AI (artificial intelligence) boom we find ourselves in today, the story at Microsoft right now is all about its cloud business, Azure. Demand for AI-capable cloud computing at Azure helped the company's "Azure and other cloud services" revenue soar 40% year over year in fiscal Q1.
And Azure commitments are showing up in the company's commercial backlog, too.
"Our commercial [remaining performance obligations (RPO)] increased over 50% to nearly $400 billion," said Microsoft CEO Satya Nadella in the company's fiscal first-quarter earnings call.
Microsoft's soaring RPOs, or the contracted revenue that it hasn't recognized as revenue yet, highlight its customers' incredible appetite for cloud computing as enterprises integrate more AI into their businesses.
With demand like this, Microsoft's Azure growth will likely be strong in fiscal Q2. But the bigger question will be whether RPOs are still trending as sharply higher as they were in fiscal Q1. Any significant deceleration in this metric could spook investors.
Notably, Microsoft chief financial officer Amy Hood said in the company's earnings call that Azure demand again exceeded supply across workloads, and she guided for Azure revenue growth of about 37% in constant currency for fiscal Q2, noting that Microsoft expects to remain capacity-constrained through at least the end of its fiscal year.
AI spending is soaring
Still, the biggest risk for Microsoft right now is probably on the spending front -- not demand.
Capital expenditures were $34.9 billion in fiscal Q1, driven by demand for Microsoft's cloud and AI offerings. And management said the rate of growth in its capital expenditures in fiscal 2026 will be greater than the rate of growth it saw in fiscal 2025.
You can see the pressure show up in profitability, even with strong top-line growth. Microsoft's fiscal first-quarter gross margin was 69%, down slightly compared to the year-ago quarter, with Hood attributing this to "investments in AI, including the impact of scaling our AI infrastructure and the growing usage of our AI product features."
Still, it's worth noting that Microsoft continues to generate substantial cash flow even as its spending ramps up. Free cash flow was $25.7 billion in the quarter, up 33% year over year.
Is Microsoft stock a buy today?
Ultimately, Microsoft's underlying business looks good, and its soaring RPOs are a positive sign for this growth potential. But with the stock commanding a price-to-earnings ratio of about 33, even as spending soars, it might make sense to hold off on buying shares.
This doesn't mean that the stock will fall when Microsoft reports earnings next week. There is no way to know how the market will react to its report. But it doesn't hurt to be cautious, hoping for a better entry point. After all, given the stock's current valuation, much of the excitement about AI is arguably already priced in.
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Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in 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.
Source: “AOL Money”
