To some investors, it may come as a shock that Microsoft (NASDAQ: MSFT) is now the cheapest stock in the “Magnificent Seven” as measured by price-to-earnings ratio. Its earnings multiple of 25 is the lowest valuation since the worst of the bear market in 2022. Even Alphabet and Meta Platforms, which had previously had the lowest valuation in the Magnificent Seven, have gained traction relative to Microsoft.
So the stock is cheap, in relative terms. But just because a mega-cap tech stock becomes inexpensive, that does not guarantee a rebound. Knowing that, should investors treat this as a buying opportunity in Microsoft or stay on the sidelines?
Will AI create the world’s first trillionaire? Our team just released a report on the one little-known company, called an “Indispensable Monopoly” providing the critical technology Nvidia and Intel both need. Continue »
Microsoft encountered a perfect storm of challenges. For one, it has a close partnership with OpenAI. Tech investors may recall how the doubts surrounding Oracle‘s $300 billion partnership with OpenAI put some hurt on Oracle stock. Likewise, around 45% of Microsoft’s $625 billion backlog is tied to OpenAI, casting some doubt on a key revenue source.
Additionally, AI stocks have sold off in general amid massive spending on capital expenditures (capex) related to AI. To this end, it has spent $49 billion in the first half of fiscal 2026 (ended Dec. 31), putting it on track for about $100 billion in capex during the fiscal year.
$100 billion sounds like a staggering amount of money to spend. But it should also be noted that Microsoft holds $89 billion in liquidity and generated over $97 billion in free cash flow over the trailing 12 months. That suggests it can afford these very expensive investments.
Moreover, Grand View Research forecasts a compound annual growth rate (CAGR) for AI at 31% through 2033, taking the industry size to $3.5 trillion if that prediction comes true, so the investments have a good chance of paying off for the company.
Furthermore, its financial performance continues to improve. In the first half of fiscal 2026, revenue of $159 billion increased by 18% year over year. Also, since it kept expense growth in check, its $66 billion in net income for the first two quarters of fiscal 2026 rose by 36% compared to the same period last year.
Finally, even with the stock price declines in recent months, Microsoft’s stock has traded flat over the past year. That factor contributed to the aforementioned 25 P/E ratio, likely forcing prospective investors to decide whether Microsoft is a buy at this stage.
