Should You Buy the Dip in Microsoft Stock?

A little more than three years ago, Microsoft (NASDAQ: MSFT) helped kick off the artificial intelligence (AI) revolution after the company invested billions into ChatGPT developer OpenAI. Since then, the Windows maker has swiftly integrated AI throughout its massive ecosystem -- from cloud computing to data analytics, software coding, and more.

Despite Microsoft being one of the most influential leaders of the AI boom, investors have been punishing its stock as of late -- with shares plummeting 16% since the company reported earnings on Jan. 28. Let's dive into the factors plaguing Microsoft stock right now and assess if the ongoing sell-off is actually an opportunity for smart investors to buy the dip.

Image source: Getty Images.

Why is Microsoft stock dropping?

One of the primary use cases for AI is how hyperscalers integrate the technology into their cloud platforms. While Amazon Web Services (AWS) holds the largest market share among major cloud services providers, Microsoft Azure is right behind it.

With each passing earnings report, investors dial in on Azure's growth relative to its peers. For the quarter ended Dec. 31, Azure's revenue increased 39% year over year. By comparison, AWS grew by 24% and Google Cloud Platform (GCP) rose 48%. While GCP is accelerating at a much faster pace than Azure and AWS, it's also a far smaller business.

With this in mind, I don't think concerns over Azure's growth are the only culprit behind Microsoft's sell-off. Rather, the company's rising infrastructure costs are beginning to make investors nervous.

During the earnings call, Microsoft CFO Amy Hood said she thinks investors are making a "direct correlation" between Microsoft's capital expenditures (capex) and Azure's revenue. This is a subtle way of saying management realizes that investors are questioning the return on investment around Microsoft's accelerating AI infrastructure build-outs.

Is Microsoft a good stock to buy now?

From a valuation perspective, Microsoft stock hasn't been this cheap since the dawn of the AI revolution. The company's price-to-earnings (P/E) multiple of 25 is hovering near its lowest levels in roughly three years.

MSFT PE Ratio data by YCharts

On top of that, the consensus price target for Microsoft stock among sell-side analysts is $596 -- implying 48% upside from current levels. To me, this suggests that Wall Street remains bullish on Microsoft's AI road map and is confident in management's ability to allocate capital strategically.

Given its attractive valuation profile and upside potential, buying Microsoft stock hand over fist might seem like a no-brainer. That said, there is still some execution risk when it comes to the company's infrastructure build-outs and their ability to bear fruit and impact Azure, as well as other pockets of Microsoft's ecosystem, in an accretive way.

For this reason, I would cautiously buy the dip in Microsoft stock right now but wouldn't bet the farm. I think the sell-off is overblown and taking advantage of the depressed price action could prove to be a savvy choice in the long run.

Adam Spatacco has positions in Amazon and Microsoft. The Motley Fool has positions in and recommends Amazon and Microsoft. The Motley Fool has a disclosure policy.