Microsoft Shares Have Fallen More Than 10% In Three Months. Time To Buy The Dip?

The software giant’s revenue from ‘Azure and other cloud services’ grew by 40% last quarter, with demand exceeding supply.
Microsoft’s commercial backlog soared, largely thanks to Azure’s commitments.
Capital expenditures totaled $34.9 billion last quarter, and management said expenses will increase gradually.
10 stocks we like better than Microsoft ›

It’s a good time to watch Microsoft (NASDAQ: MSFT) stock. Not only has the stock fallen more than 10% in three months, but it is also reporting results for the second quarter of the fiscal year after the market closes on Wednesday.

Going into the report, we know that demand for the company’s cloud computing business, Azure, is increasing. This part of the software giant’s business should therefore report another spectacular quarter. But we have less clarity on how quickly the company’s capital expenditure will grow and whether its order book will continue to grow at the extraordinary pace of the first fiscal year.

While we’ll have to wait until the update to get clarity on these items, in the meantime, do we have enough information to know if the stock is a buy now? Or is waiting for more information from the earnings report before making a decision a better move?

Image source: Getty Images.

As is the case for many tech companies during the AI (artificial intelligence) boom we are in today, the story at Microsoft is now all about its cloud business, Azure. Demand for AI-enabled cloud computing at Azure drove the company’s “Azure and other cloud services” revenue up 40% year over year in the first fiscal quarter.

And Azure’s obligations are also reflected in the company’s commercial backlog.

“Our commercial (remaining performance obligations (RPO)) increased more than 50% to nearly $400 billion,” Microsoft CEO Satya Nadella said in the company’s fiscal first-quarter earnings call.

Microsoft’s rising RPOs, or the contracted revenues it has yet to recognize as revenue, highlight its customers’ incredible appetite for cloud computing as companies integrate more AI into their businesses.

With such demand, Microsoft’s Azure growth is likely to be strong in the second fiscal quarter. But the bigger question will be whether RPOs will still rise as sharply as they did in the first fiscal year. Any significant slowdown in this metric could deter investors.

Notably, Microsoft Chief Financial Officer Amy Hood said in the company’s earnings call that demand for Azure once again exceeded supply for all workloads, and she forecast revenue growth of about 37% in constant currency for the second fiscal quarter, noting that Microsoft expects to continue to face capacity constraints until at least the end of the fiscal year.

Still, the biggest risk for Microsoft right now probably comes from spending, not demand.

Capital expenditures totaled $34.9 billion in the first quarter, driven by demand for Microsoft’s cloud and AI offerings. And management said the growth rate of capital expenditures in fiscal 2026 will be greater than the growth rate it saw in fiscal 2025.

You can see the pressure in profitability, even with strong sales growth. Microsoft’s fiscal first quarter gross margin was 69%, down slightly from the prior year quarter, with Hood attributing this to “investments in AI, including the impact of scaling our AI infrastructure and growing use of our AI product features.”

Still, it’s worth noting that Microsoft continues to generate substantial cash flow even as expenses rise. Free cash flow was $25.7 billion in the quarter, up 33% year over year.

Ultimately, Microsoft’s underlying business looks good, and rising RPOs are a positive sign for this growth potential. But because the stock has a price-to-earnings ratio of about 33, even if expenses rise, it may make sense to hold off on buying shares.

This doesn’t mean the stock will fall when Microsoft reports earnings next week. There is no way of knowing how the market will react to the report. But there’s no harm in being cautious, hoping for a better entry point. Given the stock’s current valuation, much of the excitement about AI is likely already priced in.

Before you buy shares in Microsoft, consider the following:

The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Microsoft wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.

Think about when Netflix made this list on December 17, 2004… if you had $1,000 invested at the time of our recommendation, you would have $464,439!* Or when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $1,150,455!*

It’s worth mentioning Stock Advisors total average return is 949% – a market-crushing outperformance compared to 195% for the S&P 500. Don’t miss the latest top 10 list, available at Stock Advisorand join an investment community built by individual investors for individual investors.

View the 10 stocks »

*Stock Advisor returns January 24, 2026.

Daniel Sparks and his clients have no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.

Microsoft shares have fallen more than 10% in three months. Time to buy the dip? was originally published by The Motley Fool