Microsoft Stock Just Had Its Worst Day in Two Years. Is It a Buy Now?

During the earnings call, management said that it has the first cloud to debut Nvidia‘s Blackwell system with GB200-powered AI servers. Microsoft remains on the cutting edge of AI investment and has the cash flow to pull off paying top dollar for the best of the best.

But the more it ramps up AI spending, the more pressure investors will put on the company to translate that spending into results.

For the quarter, capital expenditures (capex), including finance leases, were $20 billion. Meaning that nearly 30 cents for every dollar in revenue is getting poured into capex.

Chief financial officer Amy Hood said on the earnings call: “Roughly half of our cloud and AI-related spend continues to be for long-lived assets that will support monetization over the next 15 years and beyond. The remaining cloud and AI spend is primarily for servers, both CPUs and GPUs, to serve customers based on demand signals.”

Later in the call, Hood said: “We expect capital expenditures to increase on a sequential basis given our cloud and AI demand signals. As I said last quarter, we will stay aligned, and if needed, adjust to the demand signals we see.”

In other words, Microsoft is saying that investors shouldn’t expect some of its capex to immediately pay off, but rather that these investments will set the stage for future growth. And it is saying it could continue accelerating its capital spending.

Investors who focus on short-term matters may criticize Microsoft for getting overexcited about AI and recklessly throwing money at projects. And maybe that’s so in some respects. But the company has the resources to make these moves. So it’s better to overspend than underspend and fall behind the competition.

The company has an impeccable balance sheet with more cash, cash equivalents, and marketable securities than debt. It has a massive capital return program consisting of dividends and stock repurchases. In fiscal 2024, which ended June 30, it paid off $29.07 billion in debt and spent $21.77 billion on dividends, and $17.25 billion on stock repurchases.

It would be a red flag if management were ramping up capex at the expense of its capital return program or financial health, but that simply isn’t the case. The company can afford to invest in AI aggressively and is laying the foundation to be a leader in AI for enterprise software and cloud infrastructure.

Alternatively, it could use its excess cash on mergers and acquisitions (M&A) instead of organic growth. However, given that many of the AI investments are basically product upgrades to existing tools, the company should innovate on its own.

In fact, it can be a red flag when a company, especially a tech company, relies too heavily on M&A. It can be a sign that the company is incapable of growing on its own, either through poor management, a lack of talent, or a product and service suite that is losing market share to the competition.

The sell-off in Microsoft is a buying opportunity for investors who agree with its capital allocation strategy. Moreover, management has made it abundantly clear that it intends to continue spending aggressively on AI, which could affect its near-term growth rates. So investors who believe it should pull back on spending may decide to sell the stock. And folks who want to see more-tangible results from AI monetization may want to take a wait-and-see approach.

With just a 33.9 price-to-earnings ratio, the stock stands out as a reasonably priced way to get diversified exposure to AI, the cloud, hardware, gaming, and more. Even with heightened spending, Microsoft is still growing its revenue and EPS at double-digit growth rates. All told, it remains the complete package in blue chip growth stocks.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

Microsoft Stock Just Had Its Worst Day in Two Years. Is It a Buy Now? was originally published by The Motley Fool