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Shares of Microsoft climbed about 14% this week, recovering some lost ground after a sluggish start to the year. Despite the stock’s recent strength, the author says they are still not interested in buying.
In its fiscal second quarter of 2026 (the period ended Dec. 31, 2025), Microsoft reported revenue growth of 17% year over year to $81.3 billion. Operating income rose 21% to $38.3 billion, translating to an operating margin of about 47.1%.
The company’s Intelligent Cloud segment generated $32.9 billion in revenue, up 29% from the year-ago period. Within that segment, “Azure and other cloud services” revenue grew 39%.
Microsoft CEO Satya Nadella said during the fiscal second-quarter earnings call that the results reflect “the strength of our platform and accelerating demand.”
Looking beyond Microsoft’s results, the author argues that Azure’s growth is not keeping pace with rivals. In the same calendar period, Alphabet’s Google Cloud revenue surged 48% year over year. Meanwhile, Amazon Web Services appears to be regaining momentum, with Amazon’s cloud computing business accelerating to 24% year-over-year growth.
The author also points to large planned spending by cloud providers. Amazon plans to spend $200 billion on capital expenditures this year, while Alphabet’s budget is $175 billion to $185 billion, with a large portion tied to AI compute.
The author says the competitive environment is becoming more costly as Microsoft shifts toward building AI compute infrastructure. Historically, Microsoft has operated as a capital-light software business, but that dynamic is changing.
To meet demand for AI models and cloud infrastructure, Microsoft’s capital expenditures have risen sharply. In fiscal second quarter alone, capital expenditures reached $37.5 billion as the company acquired assets to build out compute capacity.
The author argues that this transition toward a more capital-intensive infrastructure model could weigh on profitability over time. If depreciation costs rise due to large data center investments, operating leverage could weaken—potentially reducing software profits if they become more closely tied to costly AI compute.
After the recent 14% rally, Microsoft trades at a price-to-earnings ratio of 26. The author characterizes this as neither expensive nor cheap, but says the valuation may require too much optimism given the company’s changing business dynamics and competitive risks in the AI era.
While the author describes Microsoft as a high-quality business with strong long-term potential, they say the stock’s valuation demands investors maintain robust profit margins through the AI transition. They conclude they would prefer to wait until the stock offers a wider margin of safety.
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