Microsoft Stock Is Excelling in 1 Area. But Is It Enough to Buy the Stock?

Microsoft (NASDAQ: MSFT) has been one of the top tech names to own over the past five years. The stock steadily marched up, with few dips in the middle. A lot of that rise is tied to one part of its business: Azure. Azure is Microsoft's cloud computing wing and consistently delivered quarter after quarter of growth in the high 20% range. If you're a Microsoft investor, your bull case centers around Azure growth.

However, focusing on Azure has caused Microsoft's stock to rise to an expensive valuation level. So, is the stock even worth buying today? Or has the easy money already been made?

Cloud computing is a massive trend investors can't ignore

Cloud computing is the practice of offloading some workload through the internet to an offsite data center with significant computing power. By choosing to use cloud computing instead of traditional on-site computing, companies can easily scale up or down their usage and computing power. For example, clients who want to train an AI model can access thousands of Nvidia GPUs in an Azure data center. Then, once that training session is complete, they no longer rent the computing power.

This allows companies to avoid huge upfront expenses in building their own supercomputers. Additionally, by allowing users to easily scale up or down, it avoids the inevitable realization that the machine they bought is either too big or too small.

Cloud computing is expected to be a massive industry, and with relatively little amounts of workload moved to the cloud, it is just at the beginning stages of its growth. In fact, Mordor Intelligence projects the current cloud computing market size is about $680 billion. However, that's expected to grow to $1.44 trillion by 2029. That's a huge market opportunity, and Microsoft has been doing quite well at expanding Azure's reach. It currently sits in second place in terms of market share.

But is that enough to buy the stock?

Microsoft is a solid business, but is the price you pay too high?

Unfortunately, Microsoft doesn't break out individual segments in its quarterly results, so we don't know how much money Azure generates for the company. Instead, we are forced to use old information and broad assumptions.

Back in the fourth quarter of fiscal 2023 (ending June 30, 2023), management revealed that Azure made up over half of the revenue in the intelligent cloud business segment. A year later, Azure has grown faster than all of this segment's other components, so I'll assume that Azure made up around 60% of total revenue. By using that estimation, Azure grew revenue year over year by 29% to an estimated $17.1 billion.

That's impressive growth for a division that size, and with it making up an estimated 26% of the overall business, it is a huge part of it. But with investors laser-focused on Azure, are they missing something else?

Overall, Microsoft's revenue increased 15% year over year to $64.7 billion. However, 3 percentage points of that growth came from the Activision Blizzard acquisition, which was completed earlier this year. Without that boost, Microsoft's revenue rose 12% this quarter. That's respectable growth, but does it warrant the hefty premium on the stock?

Microsoft's stock has gotten much cheaper since July, as big tech suffered a hefty sell-off. But at 31 times forward earnings , it's still expensive from a historical perspective.

MSFT PE Ratio (Forward) data by YCharts

The stock is basically as pricey as it was when it entered 2024, but that still isn't cheap.

As Azure grows to become a larger part of the overall business, you may see Microsoft's revenue tick up. But its profits may fall. Using the 36% operating margin of the cloud computing industry leader Amazon Web Services as a base case for Azure's potential, it's a decline from the 41% operating margin Microsoft posted companywide.

While this is only a modest decline, the difference over the long term is significant. This is something that all Microsoft investors must keep in mind.

But is the stock a buy here? With all the momentum against big tech, I think there will be much better buying opportunities ahead. I'd love to own Microsoft stock in the future, but only at a fair price . And 31 times forward earnings isn't that, so I will pass (for now).

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Keithen Drury has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy .