Microsoft Is a Mess. Is the "Magnificent Seven" Stock a Buy in May or Better Avoided?

Microsoft (NASDAQ: MSFT) has rallied from its 2026 lows successful a akin manner to its "Magnificent Seven" peers, Nvidia, Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), Apple, Amazon (NASDAQ: AMZN), Meta Platforms, and Tesla. But adjacent with that recovery, Microsoft is inactive down 15.7% twelvemonth to day -- a important underperformance comparative to some the S&P 500 and Nasdaq Composite.

Here's wherefore Microsoft's concern thesis has gotten much complicated, and however to attack this stock close now.

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Microsoft's AI outlays conscionable support increasing

Microsoft reported fantabulous quarterly results connected April 29. For its fiscal 2026 3rd quarter, which ended March 31, it grew gross by 18% twelvemonth implicit year, operating income by 20%, non-GAAP (generally accepted accounting principles) nett income by 20%, and non-GAAP diluted net per stock by 21%. Microsoft's artificial quality (AI) gross surpassed an yearly tally complaint of $37 billion, a 123% increase. Azure and different unreality services grew gross by 40%.

On the net call, Microsoft said it expects its superior expenditures to transcend $40 cardinal successful the 4th fourth of its fiscal 2026. But for calendar 2026, Microsoft expects $190 cardinal successful capex. This means that Microsoft plans to walk astir $118 cardinal connected capex successful the 2nd fractional of calendar 2026  (the archetypal and 2nd quarters of fiscal 2027).

For context, successful its fiscal 2025, Microsoft laid retired superior expenditures of $64.5 billion. So its quarterly capex fund volition soon beryllium astir what its yearly capex was little than 2 years ago. That drastic alteration successful its superior allocation strategy is simply a crushed for adjacent the astir assured semipermanent Microsoft investors to inquire themselves whether this level of spending volition beryllium worthy it, and whether the wealth is being utilized effectively.

Microsoft's spending isn't adjacent astatine highest levels, and it's already taking a sledgehammer to its profitability and escaped currency travel (FCF). In its latest quarter, Microsoft reported $15.8 cardinal successful FCF, which was inactive plentifulness to screen $10.2 cardinal successful dividends and stock repurchases. But it was a 22.2% year-over-year decrease.

In Microsoft's defense, portion of the crushed for the heightened spending is that it is successful a full-throttle contention with different hyperscalers for AI chips and networking instrumentality to physique information centers. But supply-chain constraints person created an AI bottleneck -- pressuring Microsoft into bidding wars for hardware with its peers. Amazon, for example, plans to walk $200 cardinal connected capex successful 2026. On its April 29 net call, Microsoft said that two-thirds of its $31.9 cardinal successful quarterly capex went toward graphics processing units (GPUs) and cardinal processing units (CPUs).