With shares down 10% after its earnings call, is Microsoft a buy?

You know expectations are high for a company when it can report a 60% year-over-year increase in profits, a 17% increase in revenue, a 45% increase in users of its flagship product, and $12.7 billion returned to shareholders this quarter…and the stock is still down 10% the next day. Microsoft (NASDAQ: MSFT) It fell victim to those expectations last Thursday as Wall Street digested its second-quarter 2026 earnings report released the day before. The sale wiped a staggering $357 billion off the tech giant’s market capitalization.

Analysts pointed to slower-than-expected growth in its cloud computing segment, as well as concerns about its plans to increase spending on data centers. Are analysts right to be upset? Or are they overreacting as the company spins in ways they don’t fully understand?

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That’s what the numbers say.

Image source: Getty Images.

Microsoft Cloud revenue totaled $51.5 billion in the quarter, up 26% year-over-year. That matched the segment’s 26% growth in the previous quarter, but analysts took a dim view that growth has failed to accelerate.

Microsoft’s $37.5 billion in spending artificial intelligence Data centers (AI) also caused consternation. That 65% jump in investment in AI infrastructure since a year ago is testing investors’ patience with the company’s AI vision, even as CEO Satya Nadella says the AI revolution is still in its “early days.”

Perhaps aware that Wall Street would be wary, CFO Amy Hood explained on the earnings call that Microsoft’s cloud business will be able to grow even faster once the company overcomes its shortage of AI hardware. However, at least four analysts cut their price targets on Microsoft.

But for all the nagging about increased capital expenditure, it’s remarkable operating expensesor what a company pays for day-to-day business functions (paying employees, research and development, keeping the lights on, etc.), grew just 5% year over year. That’s much lower than the 19% growth in operating income and 15% revenue growth the company reported, while its 14% gross margin growth shows Microsoft is becoming more efficient in production and managing direct costs.

Microsoft received $7.6 billion last quarter from its partnership with OpenAI, the pioneering company behind ChatGPT. OpenAI pledged to buy $250 billion in Microsoft Azure computing services to help train its AI models.

Its AI assistant Copilot now has 4.7 million paid subscribers, up 75% year over year. With the agent commerce market forecast to reach $500 billion by 2030, the rise of agent AI could be a big catalyst for Microsoft, especially since no other company in the Magnificent Seven can compete with its customer base of Microsoft Office Suite users to whom it can market AI agents. If Microsoft captures significant market share, it could end up paying several times over for its data center recreation.

Meanwhile, the selloff has made Microsoft shares cheaper than they’ve been in three years, as measured by their price-to-earnings (PE) ratio.

As you can see, the P/E ratio hasn’t been this low since January 2023, when stocks were starting to recover from the 2022 tech sell-off (although they came close in April 2025 at the height of tariff uncertainty). Management is likely to announce a dividend increase later this year, extending Microsoft’s dividend growth streak to 16 years and giving investors another reason to buy Microsoft stock now.

I think this temporary sell-off has created a buying opportunity for a great company at the center of the $15.7 trillion AI revolution. It may be years, if ever, before stocks get this cheap again.

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William Dahl has no position in any of the aforementioned stocks. The Motley Fool has positions and recommends Microsoft. The Motley Fool has one disclosure policy.

With shares down 10% after its earnings call, is Microsoft a buy? was originally published by The Motley Fool

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