Microsoft Corp reported a strong operating cash flow (+60% YoY) for Q2 ending Dec. 31, 2025. Free cash flow fell 9.3% YoY due to a massive increase in AI-related capex. MSFT stock is at $430.13, down over 10.4%, but there are reasons why the decline may be overdone.

Capex spending could fall, leading to a rise in free cash flow going forward. Last year, FCF was only 9% lower despite an 89% YoY increase in capex spending. Analysts expect Microsoft’s revenue to rise to $327.89 billion in fiscal 2026, projecting a potential FCF margin increase.

Despite a dip in operating cash flow to $35.758 billion, Microsoft’s FCF margin remained strong at 25.34% of sales over the trailing 12 months. With a projected rise in revenue and operating cash flow, FCF could increase by 11.1% over the next 12 months, leading to a higher market cap and stock value.

Based on projections, Microsoft’s true value could be +21.24% higher than its current market cap, implying a price target over $521 per share. The dip in MSFT stock might be overdone, presenting opportunities for value investors to consider various strategy plays.

Read more at Barchart: Microsoft’s Free Cash Flow Crashes Due to High Capex