The market has been volatile to start 2026, largely due to concerns about how companies are managing various macroeconomic uncertainties. Two of the biggest fears this year are whether artificial intelligence (AI) will displace software and whether companies will get a solid return on their AI infrastructure spending investments. Unfortunately for Microsoft (MSFT +0.66%), that puts it at the intersection of two of the market's greatest worries.
NASDAQ: MSFT
Key Data Points
As a leader in enterprise productivity software, Microsoft was not spared in the recent software-as-a-service (SaaS) stock sell-off. Meanwhile, it has also been squarely in the crosshairs when it comes to AI infrastructure spending, as its Azure cloud computing unit has been its biggest growth driver. To make matters worse, unlike cloud rivals Alphabet and Amazon, it is behind on the custom chip front, which puts its cloud computing unit at a bit of a disadvantage.
As such, Microsoft finds its stock down more than 20% year to date, as of this writing. Meanwhile, the stock has gone nowhere over the past year, down modestly, despite strong revenue and earnings growth. Last quarter, its fiscal Q2, its overall revenue climbed 17% year over year to $81.3 billion, while its adjusted earnings per share (EPS) jumped 24% to $4.14. Its growth was led by Azure, which saw revenue growth surge 39%.
Image source: The Motely Fool.
Is it time to buy Microsoft stock?
Microsoft's 365 solution remains tightly ingrained in the enterprise software market, and the company is seeing strong growth from the adoption of its AI-assistant copilots. In my view, even if there are better products on the market, it would be difficult for the company to be displaced, given how ingrained Microsoft products and services are in its customers' workflows and how it has layered important security features on top of them. After all, the introduction of the cheaper Google Workplace did little to dent Microsoft's enterprise software momentum.
At the same time, the company has one of the best backlogs in the cloud computing space. The company has a whopping $625 billion in commercial remaining performance obligations (RPOs) after it added $250 billion in commitments from OpenAI when it agreed to restructure its investment in the large language model (LLM) maker. It also still holds a more than 25% stake in the company and intellectual property rights to its LLMs and products through 2032. That's a lot of growth that should be locked in over the next few years.
After the dip in its stock price, Microsoft now trades at a forward P/E of 20 times fiscal 2027 analyst estimates. That's a solid value, though I think there are better stocks to consider in both the cloud computing (Alphabet and Amazon) and SaaS spaces.
