Microsoft, the worst-performing stock among the “Magnificent Seven” in early 2026, is showing strong business fundamentals despite its stock price slump. Revenue and earnings have accelerated, and AI products are generating significant and rapidly growing revenue.
However, the company is undertaking massive capital expenditures for data center expansion, which is impacting margins and presents risks related to demand and the OpenAI partnership. While the stock appears attractively valued with a P/E ratio of 22 and a decent dividend yield, investors should consider these substantial risks before buying.
The "Magnificent Seven" began 2026 with a stumble. Every member of this elite group experienced a downturn in the year's initial months as investors began to scrutinize the high valuations of companies focused on artificial intelligence (AI). However, most of the group has since recovered. As of this writing, the seven are collectively up for the year, with the S&P 500 showing a gain of over 8%, and Alphabet has surged more than 20%.
Yet, one prominent name has been left out of this resurgence. Microsoft (NASDAQ: MSFT) is down approximately 13% year-to-date, making it the laggard of the group. Even Tesla, which was previously neck-and-neck with Microsoft for the last place, has now pulled ahead. The same can be said for chipmaker Nvidia, fresh off another stellar earnings report, and iPhone manufacturer Apple.
What makes this disparity particularly noteworthy is that Microsoft's underlying business operations have not faltered. So, with its stock languishing at the bottom of the pack, is the software and cloud giant's stock finally a worthwhile investment?
Image source: Getty Images.
A Business That Continues to Accelerate
Microsoft's fiscal third quarter of 2026 (ending March 31, 2026) painted a picture of a company in robust health. Revenue climbed 18% year-over-year to $82.9 billion, an acceleration from the 17% growth seen in the previous quarter. Operating income also rose by 20% to $38.4 billion. Furthermore, the software giant's non-GAAP (adjusted) earnings per share saw an increase of approximately 21%.
Remarkably, Microsoft announced that its AI products now boast an annual revenue run rate exceeding $37 billion, a staggering 123% increase from the previous year. This growth is fueled by a diverse range of offerings, from external developers building on Azure, Microsoft's leading cloud computing platform, to its own Copilot assistant, which recently surpassed 20 million paid seats, adding 5 million in just one quarter.
Management has also indicated a strategic shift in its monetization approach for these AI services.
CEO Satya Nadella stated during the company's fiscal third-quarter earnings call, "Any per-user business of ours, whether it's productivity, coding, security, will become a per-user and usage business." In simpler terms, Microsoft plans to continue its established per-seat licensing model while introducing additional charges based on the actual usage of its AI tools. This hybrid model is already being implemented, starting with usage-based pricing for its GitHub coding assistant.
Furthermore, Microsoft holds a significant ~27% stake in OpenAI and possesses a non-exclusive license to its groundbreaking technology through 2032, further solidifying its AI ambitions.
NASDAQ: MSFT
Key Data Points
A Discount with Significant Caveats
Following its recent stock decline, Microsoft is trading at a forward price-to-earnings (P/E) ratio of approximately 22, placing it among the more attractively valued stocks within the "Magnificent Seven" group.
It also offers the most generous dividend yield among its peers, although at a modest 0.9%.
Considering the company's current growth trajectory, this valuation does not appear excessively high.
However, the cost of this growth comes with notable implications. Microsoft anticipates capital expenditures of around $190 billion for calendar year 2026, marking a substantial 61% increase from the previous year, driven by its aggressive expansion of data center infrastructure.
This significant investment is already beginning to impact the company's financials.
Microsoft's gross margin in its fiscal third quarter decreased year-over-year due to increased depreciation from its expanding data centers. Management expects to remain capacity-constrained at least through 2026. Moreover, should the demand for AI computing services slow down before this substantial build-out yields significant returns, the pressure on margins could intensify.
The relationship with OpenAI also presents a double-edged sword. While a single, key partner underpins a significant portion of Microsoft's commercial contracted work, it also means the company's backlog could be adversely affected if OpenAI experiences an unexpected business decline or decides to shift more of its future endeavors to other cloud providers.
Despite these concerns, the current stock discount might be overstating the risks. Microsoft stands out as one of the most affordable companies in the "Magnificent Seven," yet it is demonstrating faster growth than a year ago and possesses a clear strategy to capitalize on increasing AI usage. The substantial capital expenditure undeniably poses a risk that warrants close monitoring. Investors who are hesitant about the prolonged and costly infrastructure build-out might be better off waiting for more definitive signs of its success. However, for those willing to look beyond a period of underperformance, the "Magnificent Seven's" most unloved stock may finally merit a closer examination. It is advisable, though, to approach this as a smaller position due to the considerable risks associated with the company's ambitious and expensive AI infrastructure development.
