Even after a 40% sell-off, Microsoft doesn’t appear to be at a “bargain” for an investor who values their peace. Many would disagree, but if we unravel the business’s current situation, Microsoft is at the intersection of massive capital spending and massive potential returns…the stock’s performance hinges on the outcome.
What is Microsoft Spending Money On?
The company is heavily focused on Agentic AI and custom hardware. Projects include: Agent 365 & Copilot, custom silicon (to lower reliance on Nvidia), Stargate Supercomputer…and more. These are costing them hundreds of billions over the coming years, essentially eating away at the company’s bottomline. Microsoft MISSED January 2026 earnings because of high spending, this will be the main focus again this quarter.
In recent news, we saw Microsoft announce a voluntary buyout program from about 7% of its tenured employees. This is a strong signal that the company is putting in efforts to cut costs, not because they’re struggling, but because they want to redirect that money to buying more Nvidia GPUs and building data centers. They’re doing this because the problem is not demand, it is supply. Microsoft noted that 16% of their 39% Azure growth came specifically from AI services last quarter, and leadership noted that it would’ve been higher had they had the capacity to fulfill orders.
Their massive growth is also a signal that they may be catching up to Amazon’s AWS quickly, which currently holds the #1 spot in the cloud space.
There’s a nuance…even though their revenue is rising quickly, cost of revenue is also growing rapidly. Turns out running AI models is far more expensive than running traditional software like Word and Excel. This puts direct pressure on margins.
The Stronger U.S. Dollar Headwind:
Nearly half of Microsoft’s revenue last year was from their international business, which makes them very sensitive to currency fluctuations. Even if international business is strong, those revenues get translated back into fewer dollars, compressing growth and weighing on the top line.
Personal Opinion:
Microsoft is seeing massive revenue growth, taking it from what was a “mature” company to a growth company, but growth usually comes with cost. Every $1 of new revenue is costing them more, and which makes me a bit cautious. Microsoft is now trading at a price to earnings ratio of 26x, which is around the S&P 500’s average of 25-30x (already expensive)…which is why I’d it isn’t a bargain yet.
Investors are willing to pay higher P/E for a company when it doesn’t have any major headwinds or isn’t in a heavy spending cycle. This could explain why Apple sits at a 34x P/E right now while Microsoft is at 26x. It’ll take improving AI margins and a higher return on spending for investors to start buying steadily again…also, mind the U.S. dollar.
Option Chain Analysis:
MSFT’s option chain expiring on May 15th 2026 currently reflects an implied volatility reading of 48%, which translates to about a $36 move from the underlying stock following the report. Whether that’s bullish or bearish depends on the outcome of the earnings call and performance.
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