In recent months, Microsoft's stock (NASDAQ: MSFT) has experienced a notable decline, dropping by 22% over the past half-year, extending from the latter part of 2025 into early 2026. This downward trend has sparked discussions among investors regarding the company's future trajectory and whether the current valuation presents an attractive entry point. Despite this stock performance, the tech giant reported robust financial results for the second quarter of its fiscal year 2026, primarily fueled by the continued expansion of its cloud computing segment. This article will explore the factors contributing to the stock's recent volatility and assess its investment appeal for the long term.
Microsoft's second fiscal quarter of 2026, concluding on December 31, showcased impressive financial health, with a 17% year-over-year revenue increase, reaching $81.3 billion. The Azure cloud platform continued to be a significant growth engine, reporting a 39% surge in revenue, substantially outpacing the company's overall business growth. Concurrently, adjusted earnings per share climbed by 24% to $4.14. These figures suggest a company that is fundamentally strong and actively growing, raising questions about the disconnect between its operational success and stock market performance.
A critical element influencing investor sentiment is Microsoft's substantial capital expenditure, which amounted to $37.5 billion during the period, marking a nearly 66% increase from the previous year. This significant investment is directed towards bolstering its cloud infrastructure and advancing its ambitions in artificial intelligence. While these expenditures are vital for future growth, the market appears to be scrutinizing the rate of return on these investments, especially as Azure's growth, though still strong, is showing signs of stabilizing. The company's guidance for the third quarter, projecting a 37% to 38% increase for Azure in constant currency, indicates a moderation from prior hyper-growth phases.
The market's reaction suggests that the high growth potential of Azure, coupled with aggressive capital spending, was already factored into Microsoft's previous stock valuation. Consequently, any indication of growth plateauing, even at high levels, is perceived negatively. Investors had anticipated accelerating growth, and the current pace, while impressive, did not meet these elevated expectations. This sentiment largely explains the stock's southward movement in recent months.
However, the recent dip in stock price has recalibrated Microsoft's valuation, making it more appealing. Currently, the company's stock trades at 24.7 times forward earnings, a figure that aligns closely with the industry average of 24.5 and is considered reasonable when compared to its peers within the "Magnificent Seven" group of tech giants. This more sensible valuation, combined with Microsoft's enduring leadership in cloud computing and AI, thanks to its extensive enterprise relationships and strategic partnership with OpenAI, reinforces its long-term potential. The inherent switching costs associated with its services also provide a robust competitive advantage.
Even with a moderation in Azure's growth rate, Microsoft remains a compelling investment for those with a long-term outlook. The company has a demonstrated ability to adapt and optimize its operations, as evidenced by past cost-cutting measures. Therefore, despite recent market jitters, Microsoft's current stock levels offer an attractive opportunity for investors aiming to hold shares for five years or more.