Key Highlights
-
The company maintained its impressive double-digit revenue growth in the second quarter.
-
Microsoft’s commercial backlog surged by 110% year-over-year, with nearly half attributable to OpenAI.
-
Capital expenditures have escalated significantly as the company explores growth opportunities that require substantial investment.
2026 has had a rocky start for Microsoft investors. The stock has dropped about 18% this year and is down roughly 28% from its peak of $555.45 over the past 52 weeks. The tech sector as a whole has faced challenges as investors reevaluate stock valuations and associated risks, which is particularly noticeable in software companies.
Nevertheless, this dip doesn’t necessarily reflect the company’s performance. Microsoft announced a solid quarter marked by double-digit revenue growth and an increase in operating income, all while heavily investing in growth areas like cloud computing and AI.
This situation raises a question: is this a good time for investors to buy into Microsoft, especially considering the business fundamentals remain strong despite the falling stock price?
Strong Growth Momentum
Microsoft’s latest quarter effectively showcased the momentum in its business. For the fiscal second quarter, the company reported a 17% increase in revenue compared to the previous year, and a 15% gain when adjusted for currency fluctuations. Operating income also jumped by 21%, or 19% when accounting for currency, totaling $38.3 billion.
The breadth of Microsoft’s growth is further illustrated by its Productivity and Business Processes segment, which encompasses Microsoft 365 products, LinkedIn, and Dynamics. This segment saw its revenue rise by 16% year-over-year, amounting to $34.1 billion.
Furthermore, revenue from the Intelligent Cloud segment, primarily driven by Azure—Microsoft’s rapidly expanding cloud service—rose by an impressive 29% year-over-year to reach $32.9 billion. Specifically, “Azure and other cloud services” experienced a remarkable 39% growth.
However, Microsoft did encounter some slowdowns in its “more personal computing” segment, which contributed $14.3 billion in revenue but saw a slight drop of 3% compared to last year.
Significant Backlog
There’s potential for even more accelerated growth, especially in cloud services. Microsoft reported that its Remaining Performance Obligation (RPO) revenue soared to $625 billion in the second quarter, marking a staggering 110% year-over-year increase.
While the backlog won’t be cleared right away, the company informed investors that it anticipates recognizing about 25% of this backlog—around $156 billion—as revenue within the next year.
For those interested in AI investments, Microsoft is a viable choice. Approximately 45% of its RPO is linked to OpenAI, the organization behind ChatGPT.
Should Investors Buy, Sell, or Hold Microsoft Stock?
Considering the business’s current momentum, is it wise to purchase Microsoft stock now?
While the stock doesn’t appear to be drastically overvalued at its current pricing, it also doesn’t seem like a straightforward buy.
The existing stock price-to-earnings ratio, around 25, doesn’t seem exorbitant. However, it’s crucial to note that the considerable growth prospects in cloud computing and AI come with significant costs. This has particularly been the case in recent quarters, with Microsoft’s capital expenditures reaching $37.5 billion—up by about 66% from the previous year. A substantial portion of this increase stems from investments in infrastructure supporting AI capabilities.
Given this landscape, the stock likely leans more towards a hold rather than a buy, particularly considering the significant investment cycle Microsoft is entering. Nevertheless, for investors who genuinely believe in the long-term profitability of Microsoft’s AI-focused investments, now might be a good time to start establishing a position.
Considerations Before Investing in Microsoft
Before making any decisions regarding Microsoft stock, it’s wise to take into account various analyses from different sources. Interestingly, Microsoft didn’t make the cut among some of the currently recommended stocks, which are believed to have a greater potential for impressive returns in the near future.
In the end, as financial analysts frequently emphasize—not all stocks are created equal, and timing along with market sentiment plays a huge role in investment strategies.
