Why Microsoft's Post-Earnings Dip Is a Buy-the-Pause Moment

Key Points

• Microsoft reported revenue of $77.7 billion and EPS of $3.72, both of which exceeded estimates.
• Rising AI-related capital expenditures may temporarily limit Azure’s growth.
• Analysts maintain bullish price targets between $625 and $650, indicating a potential double-digit upside.

Investors who were hoping for an opportunity to buy the dip in Microsoft Corp. NASDAQ: MSFT stock are likely to be disappointed. MSFT stock fell just over 2% in after-hours trading following the company’s third-quarter earnings report. However, the dip is not likely to last for long, and analyst sentiment suggests that the stock’s march to $600 or higher is underway.

In a world of high-speed trading, it doesn’t take much to cause a stock to drop. Like most stocks in the tech sector, Microsoft was priced for perfection heading into earnings. Although the results were outstanding, the company’s caution about higher-than-forecast artificial intelligence (AI) expenditures weighed on investors.

AI Growth Is Expensive

The concern stems from the ongoing push-pull between AI supply and demand. Specifically, demand for high-speed compute and AI is growing faster than Microsoft’s ability to supply the key components, such as GPUs, networking chips, and power capacity that data centers need.

It’s not for lack of trying. Microsoft expects total AI capacity to grow by 80% in 2025, and its data center footprint is expected to double within the next two years.

But that growth comes with a cost. Microsoft reported that its capital expenditures (CapEx) on AI infrastructure totaled $34.9 billion, representing a 74% increase from the previously forecasted $ 20.5 billion. The company also stated that it expected capital expenditures to remain elevated into 2026.

This means that Azure may not be able to onboard new customers or expand existing workloads as quickly as previously forecast. That would create a short-term headwind for Azure’s growth, which has been a key driver of the company’s overall growth over the past two years.

However, as a testament to the overall strength of the report, Microsoft reported that its free cash flow (FCF) rose 33% year-over-year (YOY) to $25.7 billion. This helped reduce the impact of increased CapEx spending on operational cash flow.

MSFT Stock Is Priced for Perfection and Almost Delivered

Microsoft stock is trading at a forward price-to-earnings ratio of 41x. Even with analysts forecasting about 12.3% earnings growth in the next 12 months, that’s a rich valuation. For much of the last two years, however, it’s a price that investors have been willing to pay.

That could be changing. Many investors believe future growth is priced into stocks like MSFT. The company’s acknowledgment that the return on its AI investments may take longer than expected doesn’t help matters.

However, the proof is in the performance. And Microsoft’s results were strong.

• Revenue of $77.7 billion beat expectations for $75.6 billion, 18% higher YOY.
• Earnings per share of $3.72 beat expectations for $3.68; 12% higher YOY.
• Microsoft Cloud revenue came in at $49.1 billion; 28% higher YOY.
• Gross margin was up 18%.

Another highlight in the report was the signing of a new definitive agreement with OpenAI. Specifically, OpenAI has contracted an incremental $250 billion of Azure services. Microsoft also extended key revenue/IP exclusivities through 2030-2032.

MSFT Stock: A Pause, Not a Reversal

Despite the post-earnings dip, analysts remain bullish about MSFT stock. In fact, several analysts believed the earnings report was everything they could have hoped for.

The same may be true of any pause in the stock’s bullish move higher. After two gap-ups in the last month, analysts were using the term “blow off top” to describe MSFT stock. The post-earnings selling took back those gains. That means the pullback is likely a referendum on the stock’s valuation. This is why investors should view this as a potentially attractive investment opportunity.

The Microsoft analyst forecasts on MarketBeat show four analysts have weighed in on the stock since the report. The lowest price target is $625, and the highest is $650. For context, the consensus price target is currently around $631, an 18% increase.