Capital expenditures surged, causing stock prices to drop by 13%. Analysts believe that Microsoft Corporation (MSFT.US) has overreacted and that it is currently a good buying opportunity.

After releasing its second quarter financial report, Microsoft Corporation (MSFT.US) has dropped more than 13%, but is currently moving towards multi-week support levels. Despite many doubts, some analysts believe that Microsoft Corporation still holds buying value. Financial analyst Danil Sereda had previously shouted "buy" before the Q2 results, initially appearing to be out of luck. Looking at the company's quarterly updated data, Microsoft Corporation's capital expenditures surged 66% year-on-year to $37.5 billion, just in one quarter. Looking at the unlevered free cash flow level, the company is actually consuming almost all of its free cash flow. Since two-thirds of this massive capital expenditure is flowing towards short-term assets like GPUs and CPUs (with lifespans possibly as short as 5-7 years), analysts believe that the market is punishing Microsoft Corporation for its lack of immediate returns on investment. Especially when Microsoft Corporation's cloud gross margin shrinks to about 67%, reaching its lowest level in the past few years. Despite facing these risks in the past few months, analysts believe that this stock price correction is an overreaction. Sereda wrote that seeing Microsoft Corporation's Azure growth rate slow from 40% to 39%, management expects the Azure growth rate to be 37-38% in the third quarter of fiscal year 2026, confirming this deceleration. However, a growth rate of over 30% is still impressive for a cloud service provider with a 24% share of the global market. Management is intentionally sacrificing short-term Azure surface growth, as not doing so and investing all new GPU gains into Azure would, in the CFO's words, mean that "Azure growth metrics could have exceeded 40%". Regarding this issue, it can be explained that if all GPUs launched in the first and second quarters are invested in Azure, this key metric could actually exceed 40%. It is important to recognize that this investment is in technologies that benefit customers across the entire stack. Therefore, the company has actually achieved higher than usual returns from its AI investments, and Microsoft Corporation is intentionally extending these returns in the process of seizing specific technology market segments. Another weak point in the bullish logic for Microsoft Corporation is the widely cited issue of overreliance on OpenAI. Analysts believe that this argument itself is weak, as excluding the role of OpenAI, the commercial backlog of Microsoft Corporation's diversified customer base still grew by about 28% year-on-year, reaching $344 billion. CEO Ultemmann's OpenAI startup completed a $100 billion financing round at the end of February, and after the post-investment valuation reached $830 billion, negative narratives in the market about OpenAI's inability to pay should have dissipated. However, from the movement of Microsoft Corporation's stock price, the market has not yet reacted to this change. Despite increasing competition from Anthropic, Ultemann stated that monthly revenue growth has rebounded to 10%, which is very fast. Therefore, analysts believe that concerns related to about 45% (approximately $281 billion) of Microsoft Corporation's $625 billion commercial backlog and OpenAI's commitments to Azure infrastructure are excessive, as long as OpenAI continues to grow and expand, institutional investors should maintain a high demand for its equity and have no reason to worry excessively. Lastly, regarding OpenAI, analysts believe that the market has not yet factored in this: Microsoft Corporation's close AI partnerships have become professional contractors for the U.S. government. In a recent article about Palantir, it was detailed why this is seen as a tactical victory for Microsoft Corporation: But the current tactical winner is Microsoft Corporation - they have a pre-existing agreement with Azure tailored to the highest secret cloud of the U.S. government, which may help absorb the combat simulation workflow once handled by Anthropic. Hours after the relationship between Anthropic and the Pentagon had broken down, OpenAI backed by Microsoft Corporation reached an agreement with the Department of Defense, accepting the "all lawful use" standard that Anthropic had rejected. Therefore, Azure will deploy OpenAI models (including GPT-5.2) to the core of the military confidential network under limited competition, for combat simulations. Specifically discussing the catalysts for Microsoft Corporation, first and foremost, analysts believe the main catalyst is the significant pricing leverage Microsoft Corporation is implementing for its traditional user base. While Copilot adoption rates are lagging, what the market is overlooking is that starting from July 2026, Microsoft Corporation will fully hike prices for commercial Office productivity subscriptions: According to second quarter data, Microsoft 365 commercial seats grew by 6%, and the aforementioned price increase is likely to inject high-margin revenue into the productivity and business process department, which already has an EBIT margin of 60% (analysts believe it will be in the 60-65% range). Microsoft Corporation's subscriptions are inherently sticky, and no AI revolution or "atmospheric coding" operating system environment can replace them, so the price hike should help avoid widespread cancellations. Secondly, if Microsoft Corporation's intelligent AI features find a niche audience, the lower Copilot adoption rate could actually become an opportunity for its TAM growth. According to a Microsoft Corporation press release, over 80% of Fortune 500 companies use Copilot, and as the current approximately 3.3% penetration rate gradually increases to 10-15%, this will bring significant ARR growth for Microsoft Corporation and already make a strong contribution to revenue in 2027 (compared to its weak performance in 2026). Thirdly, as the major drag on Microsoft Corporation's gross margin weakens (from third-party silicon suppliers such as NVIDIA Corporation (NVDA.US) and AMD (AMD.US)), Microsoft Corporation's operating leverage should improve, driving profit growth. Microsoft Corporation has been expanding its in-house chip scale. The Maia 200 AI accelerator was launched in the second quarter, reducing total ownership costs by 30% compared to existing solutions. With Microsoft Corporation migrating more internal Copilot and OpenAI inference workloads to Maia 200 in 2026-2027, the cloud profit margin should exceed the second quarter's 67% (analysts believe it will rise to 69% or even higher). This is why Sereda agrees with recent adjustments by major analysts, and despite the stock price decline, Wall Street remains optimistic about Microsoft Corporation's prospects for 2026, 2027, and even 2028. With long-term expectations not deteriorating but mainly improving, some forecasts have grown by over 23% in the past month, leading to a significant decline in the stock's long-term valuation. Currently, looking at the P/E ratio, Microsoft Corporation is close to the valuation levels at the end of 2022: It should be noted that investors who bought Microsoft Corporation at near current valuation levels (based on P/E) have enjoyed over 120% returns in the following two years: If Microsoft Corporation's EPS for the fiscal year 2027 exceeds consensus expectations by just 2% (consistent with its long history of outperforming earnings expectations), and the stock is re-priced in the 25-30 P/E range, the implied 12-month target price would be about $528.46 per share: 27.5 times ( $18.84 1.02) = $528.462 per share. This means there is over 30% upside potential compared to the current stock price, so there is currently no reason to change the "buy" rating on Microsoft Corporation. Possible Risk Factors As previously written in the January update report on Microsoft Corporation, the company may not be able to cope with rising capital expenditures and achieve a reasonable return on investment. The issue of low Copilot adoption rates could lead to lower future investment returns, with adoption rates unable to increase. If businesses refuse to upgrade, the main path for Microsoft Corporation to increase ARPU will be interrupted. Therefore, if these risks materialize, the market is likely to give Microsoft Corporation a lower valuation multiple for expected earnings. Assuming a 20x P/E ratio for fiscal year 2027 earnings, even with the same 2% premium added to expected earnings, the stock would still be slightly overvalued (by about 5-6%). Investment Conclusion Despite the risks and concerns surrounding Microsoft Corporation's AI-driven future, analysts believe that the management's ten-year strategic vision will eventually bring substantial returns and provide patient investors with quality large-cap allocations and excess returns in the coming years. Updated valuation models show that, under reasonable (or even conservative) assumptions, the stock may be undervalued by 30%, making it a good buying opportunity.