Microsoft Stock Falls 10% Over the Past Three Months: Opportunity or Overvaluation?

The software giant’s market performance has been uneven lately. Over the past three months, Microsoft shares have declined more than 10%, creating what some investors view as a potential buying opportunity. However, a closer examination of the company’s fundamentals reveals a more complex picture that warrants careful consideration before deploying capital.

The narrative around Microsoft remains centered on its exceptional cloud infrastructure business. During its latest fiscal quarter, Azure and related cloud services achieved revenue growth of 40% year-over-year, with demand consistently outpacing available supply. This strength is reflected in the company’s commercial backlog, which has expanded dramatically, now totaling nearly $400 billion in remaining performance obligations (RPO)—a metric that represents future revenue already committed by customers.

CEO Satya Nadella emphasized the scale of this expansion during recent earnings discussions, noting that the company’s RPO increased by over 50% compared to the prior year. This expansion signals genuine customer commitment to AI-enabled cloud infrastructure as enterprises accelerate their digital transformation initiatives. Azure’s growth trajectory appears particularly resilient, with management guiding for approximately 37% revenue growth in the current quarter even as the company continues to operate under capacity constraints through the fiscal year’s end.

Azure’s AI Momentum Remains a Bright Spot

Despite broader market concerns, Microsoft’s cloud division continues to demonstrate exceptional execution. The 40% year-over-year growth in Azure services reflects not temporary demand but sustained enterprise investment in AI-capable infrastructure. The company’s supply limitations—acknowledged by CFO Amy Hood—suggest demand constraints rather than any fundamental business deterioration.

The RPO expansion to nearly $400 billion provides visible evidence of durable growth ahead. This metric matters because it represents binding customer commitments, not speculative bookings. The over-50% year-over-year increase in RPO indicates that Microsoft’s customers are doubling down on their cloud investments, embedding themselves deeper into the Azure ecosystem.

Capital Investment: The Hidden Profitability Challenge

However, the most pressing concern for Microsoft investors lies not in demand but in the cost structure required to satisfy it. The company deployed $34.9 billion in capital expenditures during the recent quarter, and management explicitly stated that spending will accelerate further throughout the fiscal year. This dramatic capex trajectory is already visible in the company’s financial metrics.

Gross margin contracted to 69% in the latest quarter, down from the prior year’s level. Microsoft’s management attributes this decline to “investments in AI, including the impact of scaling our AI infrastructure and the growing usage of our AI product features.” In plain terms, the company is sacrificing near-term profitability to build out the infrastructure demanded by customers.

Yet there’s an important counterpoint: despite heavy capex spending, Microsoft generated $25.7 billion in free cash flow during the quarter, representing 33% growth year-over-year. The company continues to generate substantial cash despite the investment surge, suggesting the business model remains fundamentally healthy even under infrastructure stress.

The Valuation Question Becomes Critical

Microsoft now trades at a price-to-earnings ratio of approximately 33, a premium valuation even for a company posting strong top-line growth. The key risk is whether this valuation leaves sufficient room for upside surprise or whether much of the AI enthusiasm is already embedded in the current stock price.

When a company trades at 33 times earnings, the margin for disappointment narrows considerably. Azure growth would need to accelerate beyond current guidance, or capex needs would need to moderate unexpectedly, to justify further upside. Meanwhile, any moderation in cloud spending growth or a sustained compression in margins could prove disappointing to investors positioned for continued multiple expansion.

The current valuation leaves limited room for typical investment errors. A guidance miss, a slower-than-expected moderation in capex spending, or any indication that capacity constraints might ease without proportional demand growth could all trigger selloffs.

Waiting May Be the Prudent Path Forward

While Microsoft’s underlying business demonstrates strength, and the Azure growth story remains intact, the stock’s current valuation presents a classic investor dilemma. The 10% decline over three months may seem attractive in absolute terms, but it represents only a modest valuation adjustment from prior peaks.

The question isn’t whether Microsoft is a good company—it clearly is. Rather, it’s whether Microsoft is a good investment at current prices. With the stock commanding a 33x P/E multiple and much of the AI narrative already priced into the shares, the risk-reward proposition favors patience.

Investors with strong conviction about Microsoft’s long-term AI infrastructure dominance might dollar-cost average into positions. However, for those with flexibility, waiting for either a more significant price decline or clearer evidence that capex spending is moderating could provide a superior entry point.

The company’s fundamental strength remains intact, but valuation discipline matters in investing. Sometimes the best investment decision is waiting for better odds rather than betting at unfavorable prices.