Is MSFT Stock Vulnerable to Rising Capex Pressure From AI Spending?

Core Insights - Microsoft reported strong fiscal second-quarter 2026 earnings, with revenues of $81.3 billion, a 17% year-over-year increase, and operating income rising 21% to $38.3 billion, but concerns over capital expenditure led to a nearly 5% drop in stock price after hours [1][2] Financial Performance - For the quarter ended December 31, 2025, Microsoft achieved revenues of $81.3 billion, a 17% increase year-over-year, and operating income of $38.3 billion, up 21% [2] - Non-GAAP earnings per share were reported at $4.14, indicating solid performance by conventional measures [2] Capital Expenditure - Capital expenditures and finance leases for the quarter reached $37.5 billion, a significant 66% increase from the previous year, exceeding market expectations [3] - The first half of fiscal 2026 saw total capital expenditures of $72.4 billion, suggesting an annual infrastructure spending trajectory of approximately $100 billion [3] - Two-thirds of the second-quarter capital expenditure was allocated to short-lived assets, primarily GPUs and CPUs, while the remainder was directed towards long-lived infrastructure [3] Market Dynamics - Microsoft acknowledged that customer demand continues to exceed supply, with guidance indicating a slight decline in operating margins for the fiscal third quarter [4] - The cost of goods sold is expected to grow by 22% to 23%, and capital expenditure is projected to decrease sequentially in the third quarter [4] Backlog and Future Revenue Potential - The commercial remaining performance obligation stands at $625 billion, more than doubling year-over-year, with 45% linked to OpenAI commitments, indicating future revenue potential but also sustained infrastructure obligations [5] - Rising R&D costs contribute to stock sensitivity regarding the pace of AI infrastructure buildout relative to revenue conversion [5] Industry Comparisons - Microsoft is not alone in facing capital expenditure pressures; Amazon has guided for approximately $200 billion in capital expenditures for 2026, while Alphabet projects $175 billion to $185 billion, both companies experiencing similar investor scrutiny regarding infrastructure-heavy AI investments [6] Stock Performance and Valuation - Microsoft shares have declined by 21.2% over the past six months, outperforming the Zacks Computer – Software industry decline of 24.5% but underperforming the Zacks Computer and Technology sector's return of 10.6% [7] - The stock is currently trading at a forward 12-month Price/Sales ratio of 8.25X, compared to the industry's 6.92X, indicating a relatively higher valuation [10] - The Zacks Consensus Estimate for fiscal 2026 earnings is $16.97 per share, reflecting an 8.4% increase over the past 30 days and a year-over-year growth of 24.41% [13]