Should You Buy Microsoft Stock Now That It's Back Within 6% of Its Record?

Microsoft (NASDAQ:MSFT) spent the first half of 2026 moving the wrong way. From a record close of $542.07 on Oct. 28, 2025, the stock fell to $352.83 by June 25 -- a drop of about 35%.

The recovery has been just as sharp. At roughly $516 as I write, including a gain of over 3% on Friday, shares have risen about 46% from the late-June low. They are now only about 5% off the record.

But most of the rebound happened in one week. The stock leaped around 26% in the four trading days after Microsoft's fiscal fourth-quarter report on July 29. It has mainly traded between about $480 and $515 since.

So, is what's left of the gap to the record a buying window, or have the easy gains already been made?

Image source: Getty Images.

A $190 billion tab

When Microsoft posted its fiscal third-quarter results in late April, Amy Hood, the company's chief financial officer, said it expected to spend around $190 billion on capital expenditures in calendar 2026.

Meanwhile, growth for Azure, Microsoft's cloud computing platform, was stuck near 40%. Revenue from Azure and other cloud services rose 40% for Microsoft's fiscal first quarter of 2026 (the three months ended Sept. 30, 2025). Growth then came in at 39% and 40% in the next two quarters.

It was impressive growth for a business this size. But it was a flat line beside a spending plan that kept getting bigger.

Investors seemed worried that Microsoft was spending faster than Azure could grow. After a rally in May, the stock slid around 22% from the end of that month to its June 25 low.

Azure finally sped up

The July report changed that picture. Azure and other cloud services revenue rose 43% for the three months ended June 30 -- well above the 39% to 40% range management had predicted in April. Hood credited efficiency gains and faster delivery of new capacity, and she said the added capacity "was quickly monetized."

She then guided for Azure growth of around 45% in constant currency for the quarter ending Sept. 30. In September, Microsoft shifted a few businesses out of Azure in a reporting change. This cuts the June quarter's growth to 42% and the guidance to 44% to 45%. Reaching that mark would mean a second straight quarter of faster growth.

The spending, notably, didn't shrink. Capital expenditures, including finance leases, rose 69% year over year to $41 billion in the June quarter, up from $31.9 billion three months earlier. Management now sees calendar 2026 spending at around $175 billion. But Hood said the smaller number comes from an accounting change for some data center leases, and that the underlying plan for the year hasn't changed. She also expects capital spending to climb again in fiscal 2027.

In other words, the cost of Microsoft's artificial intelligence (AI) build-out didn't drop in July. Azure's growth just finally began to speed up alongside it. I think that shift is what investors paid for in the days that followed.

Is the stock still a buy?

The valuation arguably looks much more reasonable than it did at the high. At its record close in October 2025, Microsoft traded at around 40 times earnings. Now, shares trade at about 29 times earnings, using the $17.95 per share Microsoft earned in fiscal 2026.

The change mostly came from earnings growth. Earnings per share climbed 32% last fiscal year, or 22% excluding the effect of Microsoft's investment in OpenAI.

Cash is another story. Operating cash flow grew 30% year over year to $55.4 billion in the June quarter. Free cash flow (operating cash flow minus cash spent on property and equipment), though, dropped around 23% to $19.6 billion. For the full fiscal year, free cash flow slid to around $67 billion from about $72 billion. And Hood's stated aim for fiscal 2027 is just to "remain free cash flow positive."

Sure, OpenAI is still a risk. Microsoft's arrangements with the ChatGPT maker produced $24.1 billion of its fiscal 2026 revenue, and OpenAI reportedly burned $3.7 billion of cash from January through March alone. But Hood said almost 90% of Microsoft's cloud revenue last fiscal year came from customers other than the firms making frontier AI models.

In the end, I don't think the remaining gap is much of a buying window. The business is in better shape than it was in June, and Azure might keep speeding up. But the price already reflects a good part of that, while the spending keeps climbing and free cash flow is still dropping.

If Azure posts growth around 45% this quarter and free cash flow starts rising again, I'd consider buying. For now, I think Microsoft stock is about fairly priced.

Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft. The Motley Fool has a disclosure policy.