Microsoft's Stock Has Slumped 10% This Quarter—Should You Buy the Dip?

Microsoft stock has dropped significantly over the past three months, creating what some investors view as a potential buying opportunity. However, before jumping into the market, there are several important factors to consider. The company reports its fiscal second-quarter results this week, which may provide critical insights into whether now is truly the right moment to buy the dip or if patience might be the wiser strategy.

Azure’s Explosive Growth Signals Sustained Demand

The strongest narrative surrounding Microsoft right now centers on its Azure cloud business. The surge in demand for AI-capable cloud computing has been remarkable. In fiscal Q1, “Azure and other cloud services” revenue climbed 40% year over year, demonstrating the powerful appetite enterprises have for these capabilities as they integrate artificial intelligence into their operations.

This demand isn’t just showing up in revenue—it’s also visible in the company’s backlog. Microsoft CEO Satya Nadella revealed that the company’s commercial remaining performance obligations (RPO)—essentially contracted revenue not yet recognized—jumped over 50% to nearly $400 billion. This figure is particularly significant because it reflects customer commitments that will convert to recognized revenue in future quarters.

However, Chief Financial Officer Amy Hood added an important caveat: Azure demand continues to exceed available capacity. This supply constraint actually carries both positive and negative implications. On one hand, it validates the strength of customer appetite. On the other hand, Microsoft may be leaving growth on the table due to infrastructure limitations. Management has guided for approximately 37% Azure revenue growth in the current quarter and expects to remain capacity-constrained through the remainder of its fiscal year. The question investors must grapple with is whether these supply limitations will ease quickly enough to prevent material growth deceleration.

The Capital Expenditure Pressure Mounting

While the growth story is compelling, there’s a significant counterweight: the rising cost of supporting this expansion. Microsoft spent $34.9 billion on capital expenditures in the most recent quarter alone—a massive figure driven primarily by investments in cloud infrastructure and AI capabilities. More concerning, management indicated that capital spending will accelerate further in fiscal 2026, growing at a faster rate than it did in fiscal 2025.

This spending trajectory is already pressuring profitability. The company’s fiscal Q1 gross margin stood at 69%, down from the prior-year period. CFO Hood attributed this decline to “investments in AI, including the impact of scaling our AI infrastructure and the growing usage of our AI product features.” For an investor considering whether to buy the dip, this deteriorating margin profile raises questions about near-term earnings power even as revenues accelerate.

That said, Microsoft continues to generate substantial cash despite the spending ramp-up. Free cash flow reached $25.7 billion in the quarter, up 33% year over year. This demonstrates the underlying business still produces significant cash generation capability, even as capital intensity increases.

The Valuation Puzzle

Microsoft trades at approximately 33 times earnings, which raises a critical question for prospective buyers: is this an attractive entry point? At this price-to-earnings multiple, investors are already pricing in considerable optimism about the company’s AI trajectory and cloud growth potential. The broader technology sector’s excitement about artificial intelligence has likely been reflected in the stock’s valuation for some time already.

A 10% decline over three months, while meaningful, doesn’t necessarily represent a compelling reset in valuation given the current earnings multiple. The stock would need to fall significantly more—or earnings would need to expand considerably faster than expected—to make a strong case that the current price represents a true bargain.

Should You Buy the Dip Now, or Wait?

The fundamental business at Microsoft looks healthy, and the soaring backlog of customer commitments provides genuine confidence in near-term growth. Azure’s position in the AI revolution appears as secure as any cloud platform in the industry. Yet investors face a dilemma: the company’s ability to convert this opportunity into bottom-line profits remains uncertain given rising infrastructure costs.

For those considering whether to buy the dip, a measured approach might be prudent. Rather than rushing to deploy capital at current valuations, waiting for either a more attractive entry price or additional clarity from upcoming earnings reports could prove wise. The market may not immediately punish the stock when Microsoft reports, but history suggests that patience often pays off in investing—especially when a company’s valuation already reflects much of the expected excitement.

There’s no shame in sitting on the sidelines temporarily. A better entry point may emerge, allowing investors to participate in Microsoft’s AI-powered growth story without overpaying at today’s valuation multiples.