Microsoft stock: is post-earnings pullback last chance to buy cheap?

Microsoft stock (NASDAQ: MSFT) delivered another strong quarter on Wednesday, beating Wall Street’s earnings estimate and showing that demand for its AI products is still running hot.

Diluted earnings came in at $4.27 a share, above the $4.07 consensus, while Azure and other cloud services revenue rose 40% year over year.

Microsoft Cloud revenue topped $54 billion, and the company said its AI business had passed a $37 billion annual run rate.

Even so, investors were not fully convinced as Microsoft stock has been under pressure for months and the market keeps asking familiar questions.

How long can Microsoft spend at this pace before the payoff becomes obvious?

Selloff was never really about the quarter

The recent weakness began well before this earnings report.

In late January, Microsoft stock dropped 6.5% in after-hours trading after the company said it had spent a record amount on artificial intelligence and posted cloud growth that barely cleared expectations.

The selloff reflected investor concern that a huge OpenAI-linked bet and rising AI costs were not yet producing a clear enough return.

By the end of the first quarter, the stock had fallen 23%, its worst quarterly performance since 2008.

As per the analysts, it's not about Microsoft executing badly, but investor concerns about how long the AI spending cycle would last before revenues caught up.

That anxiety is lingering as Microsoft expects to spend $190 billion in calendar 2026, well above market expectations, and that capital spending in the March quarter reached $31.9 billion.

CFO Amy Hood said about $25 billion of the year’s spending would go toward higher chip costs.

Microsoft also said it expects Azure and other cloud services revenue to grow 39% to 40% in the fiscal fourth quarter.

Valuation case is hard to ignore

That is where the bull case starts to sharpen.

Morningstar says Microsoft deserves a 5-star rating and values the stock at $600 a share, calling it significantly undervalued on its long-term model.

Morgan Stanley is also staying constructive as analyst Keith Weiss said Microsoft “remains in pole position to garner increasing IT Wallet share as GenAI adoption ramps and cloud migrations pick up,” and added that the company’s AI leadership and margin potential are “well underpriced.”

The bank has kept Microsoft as a top pick in large-cap software.

The operating data backing that view are still solid as Microsoft said users of its $30-a-month M365 Copilot product increased to 20 million from 15 million in January, while Azure growth held at 40% in the third quarter.

Microsoft stock: Next catalyst is guidance

Options traders were already braced for a big move, with the market pricing roughly a 6.5% swing in either direction around earnings.

That tells you how much uncertainty was already embedded in the stock.

The reported beat cleared one hurdle, but the next test is whether Microsoft can keep Azure reaccelerating into the June quarter.

The tech giant has to also prove that the $190 billion capex plan is turning into revenue growth rather than just heavier depreciation and tighter cash flow.

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