Microsoft's Free Cash Flow Crashes Due to High Capex - But Is MSFT Stock's Dip Overdone?

Core Insights - Microsoft Corp (MSFT) reported a significant increase in operating cash flow, up 60% year-over-year for fiscal Q2 ending December 31, 2025, but free cash flow (FCF) decreased by 9.3% year-over-year and 77% quarter-over-quarter due to increased AI-related capital expenditures [1] - The stock price of MSFT has declined over 10.4% from $481.63 to $430.13, raising questions about its future stability [1] Group 1: Capital Expenditures and Free Cash Flow - Management anticipates a decline in capital expenditures on a sequential basis due to normal variability in cloud spending and finance leases [2] - The increase in capex spending may be attributed to seasonal factors, as seen in previous years where capex spiked in fiscal Q2, leading to a subsequent rise in FCF in the following quarter [3] - In the latest quarter, FCF was only 9% lower than the previous year, despite an 89% year-over-year increase in capex and a 60% increase in operating cash flow [3] Group 2: Operating Cash Flow Trends - Operating cash flow fell from $45 billion in Q1 to $35.758 billion, representing a 20.6% quarter-over-quarter decline, with a worse decline of 34.8% year-over-year in the prior year [4] - The capex spending increase was influenced by a significant quarter-over-quarter rise from $19.394 billion in Q1 to $29.876 billion in Q2, a 48.9% increase [4] - Investors should not expect another quarterly 50% increase in capex spending, and operating cash flow is expected to continue rising significantly [5] Group 3: Free Cash Flow Margin Projections - Despite the 20% quarterly dip in operating cash flow to $35.758 billion and a spike in capex spending, Microsoft's FCF margin remains strong compared to the previous year [7]