Despite a 14% gain this week, these “Magnificent Seven” stocks are still my least favorite
Stocks of tech giants microsoft (MSFT +0.60%) It’s up about 14% this week, regaining some of the ground it lost after a sluggish start to the year.
But despite the stock’s recent strength, I still have no interest in buying.
At first glance, there’s a lot to like about Microsoft’s recent financial results, including strong revenue and earnings growth. However, new competitive challenges and changing financial dynamics ultimately made this stock the least favorite among its “Magnificent Seven” peers.
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Strong quarter but lost one step
In the second quarter of fiscal 2026 (ending December 31, 2025), the company’s revenue increased 17% year-over-year to $81.3 billion. Profitability also increased, with operating profit increasing 21% to $38.3 billion. This translates to an impressive operating margin of around 47.1%.
An important driver of this growth was the company’s Intelligent Cloud segment, which generated $32.9 billion in revenue, up 29% year-over-year. Within that segment, revenue from Microsoft’s cloud computing business, “Azure and Other Cloud Services,” grew an impressive 39%.
This strong performance in the cloud reflects “the strength of our platform and accelerating demand,” Microsoft CEO Satya Nadella said during Microsoft’s fiscal second-quarter earnings call.
But zoom out, and the cloud narrative gets a bit more complicated. The growth of Microsoft’s Azure and other cloud services is arguably not keeping up. alphabet‘S (GOOG +1.99%) (google +1.71%) Google Cloud saw revenue surge 48% year over year during the same period
And Microsoft’s biggest competitor, Amazon Web Services (AWS), appears to be regaining its footing. Amazon‘S (AMZN +0.26%) The cloud computing business recently accelerated to 24% year-on-year growth.
The competitive landscape is becoming more intense, with Google Cloud expanding much faster than Microsoft’s cloud business and Amazon’s cloud division accelerating again. Leading the way in an increasingly competitive landscape, Amazon plans to spend $200 billion on capital expenditures this year, compared to Alphabet’s budget of $175 billion to $185 billion, much of which is being driven by AI computing.
The real problem is capital intensity.
And this increasingly competitive environment is paired with a more costly environment.
Historically, Microsoft has run an incredibly thin software business. But this dynamic appears to be changing quickly as companies engage in an arms race to build AI computing.
Microsoft’s capital spending has surged to meet surging demand for AI models and cloud infrastructure. In the fiscal second quarter alone, the company’s capital spending reached $37.5 billion as it aggressively acquired assets to build computing capacity.
The shift to a more capital-intensive infrastructure provider could strain the company’s profitability over time. If a company’s depreciation costs increase due to such large-scale data center investments, the operating leverage expected by investors may weaken.
That means Microsoft’s software business profits could decline as it becomes more closely tied to costly AI computing, and Microsoft’s business relies heavily on software.
Is Microsoft stock a buy?
This brings about the valuation of the stock.
Microsoft, which has recently gained 14%, trades for a price-to-earnings ratio of 26. This isn’t expensive, but it’s definitely not cheap. This is especially true given changes in the nature of Microsoft’s business and competitive environment.
A premium like this assumes that the software giant will seamlessly navigate the AI transition while maintaining solid profit margins even as competition intensifies.
Microsoft is a high-quality company with strong long-term potential, but given the unique risks the company faces in the AI era, its stock valuation is asking for too much optimism from investors today.
I personally prefer to wait on the sidelines until the stock is trading at a price that gives me a wider margin of safety.
