Does Microsoft's Prudent Approach to the AI Infrastructure Buildout Make the Stock a Buy?

Microsoft (NASDAQ: MSFT) delivered another strong quarter when it reported its fiscal Q1 results after the bell on Oct. 28, powered by its cloud computing segment and rapid Copilot adoption. While the stock has rebounded from its lows, it's still trading around breakeven over the past year.

Let's take a closer look at the company's fiscal Q1 results and prospects to see if now is the time to buy the stock.

Image source: The Motley Fool

Azure growth continues

Microsoft's cloud computing unit, Azure, once again fueled its growth, with revenue surging 48% year over year to $33.17 billion. It was the 13th straight quarter in which Azure revenue climbed by 30% or more, an acceleration from its 43% growth the prior quarter. The growth came despite some capacity delays, with upside driven by gains in graphics processing unit (GPU) and central processing unit (CPU) efficiency and higher revenue per token. It projected Azure revenue to accelerate to 49% to 50% constant-currency growth in Q2, as demand continues to outpace capacity.

Bookings fell 12%, while remaining performance obligations (RPOs), which include future Azure commitments, soared 73% year over year to $677 billion. The company said approximately 30% of these commitments will be recognized as revenue over the next 12 months.

Microsoft's total revenue climbed 19% year over year to $92.3 billion, while adjusted earnings per share (EPS) increased 18% to $4.89. The results topped the analyst consensus for $90.69 billion in revenue and $4.73 in adjusted EPS, as compiled by LSEG.

Microsoft now reports in two segments: agents & infrastructure and devices & consumer. The agents & infrastructure segment saw revenue climb 25% to $76.8 billion, while devices & consumer revenue fell 3% to $15.5 billion.

Microsoft 365 cloud revenue, which includes Microsoft 365 commercial subscriptions and GitHub, jumped by 17% year over year to $27.8 billion. The growth was led by Copilot, which saw an eightfold increase in customers to over 50,000 seats.

The company said expanding its model to include consumption has increased both its average revenue per user (ARPU) and addressable market. This is benefiting both GitHub and Copilot. Since the company changed its pricing model, it said that credit consumption for GitHub agentic AI features has more than doubled.

Below is a breakdown of Microsoft's revenue by offering.

Data source: Microsoft press release. YOY = Year over year.

With investors closely watching capex and free cash flow, Microsoft generated free cash flow of $18.6 billion after spending $45.2 billion on capex. It said about 75% of that was on short-lived assets like GPUs and CPUs.

Looking ahead, management guided for fiscal 2027 Q2 revenue of between $96 billion and $97.1 billion, representing 18.5% growth at the midpoint. The growth will be driven by an expected 24%-25% increase in revenue in its agents & infrastructure segment. It is expected to spend over $50 billion in capex in fiscal Q2 and $170 billion for the full year.

Is the stock a buy?

In a world where hyperscaler capex budgets are sky-high given their heavy spending on AI infrastructure, investors appear to have started to take a liking to Microsoft's brisk but measured pace, as it continues to see strong growth while generating ample free cash flow. While it is missing out on some growth, this is the safer path.

At the same time, Copilot adoption continues to drive growth, and the introduction of a consumption component to its AI solutions is starting to pay off. Once considered an AI loser, Microsoft has flipped the script and now looks like a top AI software-as-a-service (SaaS) name.

With a forward price-to-earnings (P/E) ratio of 22 times based on fiscal 2028 analyst estimates (ending June 2028), Microsoft's stock is attractively valued given its growth outlook and prudent capex approach. The stock should have solid upside from here, making it a buy.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft. The Motley Fool has a disclosure policy.