Microsoft Stock Is Down More Than 10% In 3 Months. Time to Buy the Dip?

Core Viewpoint - Microsoft is experiencing significant growth in its cloud business, Azure, driven by surging demand for AI-capable cloud computing, but there are concerns regarding the sustainability of its capital expenditures and backlog growth [1][3][4]. Group 1: Azure Demand and Performance - Demand for Azure has led to a 40% year-over-year revenue increase in fiscal Q1 for "Azure and other cloud services" [3]. - The company's commercial remaining performance obligations (RPO) increased over 50% to nearly $400 billion, indicating strong customer demand for cloud services [4]. - Azure revenue growth is expected to be around 37% in constant currency for fiscal Q2, with ongoing capacity constraints anticipated [6]. Group 2: Capital Expenditures and Profitability - Capital expenditures reached $34.9 billion in fiscal Q1, driven by cloud and AI demand, with growth in capital expenditures expected to accelerate in fiscal 2026 compared to fiscal 2025 [8]. - Despite strong revenue growth, Microsoft's gross margin was 69%, slightly down from the previous year, attributed to investments in AI infrastructure [9]. - Free cash flow for the quarter was $25.7 billion, reflecting a 33% year-over-year increase, indicating robust cash generation despite rising expenditures [9]. Group 3: Stock Valuation and Market Sentiment - The stock is currently trading at a price-to-earnings ratio of about 33, suggesting that much of the excitement around AI may already be priced in [10]. - There is uncertainty regarding how the market will react to the upcoming earnings report, leading to a cautious approach for potential investors [11].