3 Reasons to Hold Microsoft Stock Despite 28.6% Drop in 6 Months

Microsoft MSFT has had a rough run in recent months, with its stock shedding 28.6% in the past six-month period, underperforming the Zacks Computer and Technology sector's decline of 7.9% as the underlying business continues to post impressive growth. The decline reflects broader macro headwinds, AI-related cost concerns and shifting investor appetite for high-multiple technology names.

Yet the fundamentals that define Microsoft's long-term investment thesis remain largely intact. Investors currently holding shares may find it prudent to stay the course, while those looking for entry may be better served waiting for clearer signals.

MSFT’s 6-Month Price Performance

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Azure Growth Remains a Compelling Catalyst

Microsoft's Intelligent Cloud segment generated $32.9 billion in revenues in the second quarter of fiscal 2026, representing a year-over-year increase of nearly 29%. Azure and other cloud services revenues advanced 39% during the quarter, driven by strong enterprise adoption of cloud infrastructure and AI workloads. Management provided forward-looking guidance projecting Azure revenue growth of 37% to 38% in constant currency for the third quarter of fiscal 2026. The company acknowledged that demand continues to outpace its available infrastructure, and it now expects to remain capacity-constrained through at least the end of the fiscal year. This sustained demand-supply gap reinforces the depth of enterprise commitment to Azure's platform, and as additional capacity comes online in the second half, it could act as a meaningful accelerant to top-line growth.

AI Monetization Is Gaining Real Traction

Microsoft's AI investments are beginning to manifest in concrete business metrics. In March 2026, the company reorganized its Copilot leadership structure to accelerate development of agentic AI products across its ecosystem, including Copilot Tasks, Agent 365, and Office-integrated agentic capabilities. Microsoft also expanded Microsoft 365 Copilot in March with new features, including video recap for meeting summaries, enhanced Researcher output formats that allow users to export polished reports directly to PowerPoint, PDF, or audio, and the public preview of AI in SharePoint. These updates signal a deliberate push to deepen enterprise AI adoption at the application layer. On the commercial side, bookings surged 230% in the second quarter of fiscal 2026, and the commercial remaining performance obligation reached $625 billion, up 110% year over year, underscoring the scale of long-term customer commitments underpinning Microsoft's AI-driven revenue outlook.

Earnings Strength and Shareholder Returns Offer a Cushion

Microsoft's second-quarter fiscal 2026 earnings report delivered results ahead of expectations across revenues, operating income and earnings per share. Revenues of $81.3 billion represented 17% year-over-year growth, while non-GAAP diluted EPS of $4.14 beat estimates by 6.7% and grew 24% from the year-ago period. Operating income rose 21% to $38.3 billion. For the third quarter of fiscal 2026, management guided for revenues between $80.65 billion and $81.75 billion, implying roughly 15% to 17% annual growth. The company now expects full-year operating margins to rise slightly, supported by first-half investment prioritization and favorable revenue mix shifts. Microsoft also announced a quarterly dividend of 91 cents per share in March 2026, payable in June. The company returned $12.7 billion to shareholders through dividends and share repurchases during the second quarter, up 32% year over year.

The Zacks Consensus Estimate for MSFT's fiscal 2026 earnings is pinned at $17.10 per share, indicating 25.37% year-over-year growth — a compelling trajectory for a company of Microsoft's scale.

Microsoft Corporation Price and Consensus

Microsoft Corporation price-consensus-chart | Microsoft Corporation Quote

Valuation and Competitive Landscape

From a valuation standpoint, the stock trades at a forward 12-month Price/Sales ratio of 7.56X, above the Zacks Computer – Software industry's 6.37X, and carries a Value Score of D, suggesting the shares may not represent a bargain at current levels.

MSFT’s Premium Valuation Suggests Caution

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In the cloud arena, Microsoft's Azure competes with Amazon AMZN-owned Amazon Web Services, Alphabet GOOGL-owned Google Cloud and Oracle’s ORCL Oracle Cloud Infrastructure. Amazon remains the market leader in cloud infrastructure, while Google has been aggressively expanding its AI-powered cloud capabilities. Oracle has carved out a defensible niche in database and enterprise workloads. As Microsoft continues to invest heavily in AI infrastructure to fend off competition from Amazon, Google and Oracle, its ability to sustain Azure's growth rate and expand cloud margins will be central to the stock's re-rating potential.

Hold Now, But Watch the Entry Point

The case for holding Microsoft in 2026 is supported by its cloud growth momentum, expanding AI product suite, and consistent ability to exceed earnings expectations. Near-term risks merit attention nonetheless. The company's gross margin came in at 68% in the second quarter of fiscal 2026, down slightly year over year as AI infrastructure costs and rising product usage outpaced efficiency gains. Cloud gross margin is expected to decline further in the fiscal third quarter due to continued infrastructure investments. The Productivity and Business Processes segment guided for third-quarter revenues of $34.25 billion to $34.55 billion, or 14% to 15% growth, with Microsoft 365 commercial cloud revenue growth expected at 13% to 14% in constant currency. Windows OEM revenues and Xbox content and services are each expected to fall in the low to mid-single digits. For existing shareholders, the long-term investment thesis remains compelling enough to hold through short-term volatility. Prospective investors may benefit from waiting for better visibility on margin recovery and capacity expansion before initiating a fresh position. Microsoft currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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