Microsoft continues to show strong growth in sales and profits, driven by demand for AI and cloud services. Revenue in the first quarter of fiscal 2026 increased by 18% to $77.7 billion, with cloud business revenue up 26% to $49.1 billion. However, the high valuation of the stock may impact future returns.

Investors are bullish on Microsoft’s role in AI and cloud computing, with shares up 16% in 2025. The company is adding AI features to products like Microsoft 365 and Azure, leading to double-digit revenue growth. Commercial bookings increased by 112%, highlighting strong demand for AI capabilities.

Despite substantial AI investment, Microsoft’s free cash flow increased by 33% in fiscal Q1. The company spent $10.7 billion on dividends and buybacks, returning cash to shareholders. However, the stock’s high P/E ratio of 35 leaves little room for error in the AI-driven growth story.

Microsoft’s substantial AI investments could yield significant returns, but the stock’s current valuation may limit upside potential. Investors should consider waiting for a better entry point before investing. The company’s AI spending and cloud momentum are driving growth, but uncertainties remain in the market.

Read more at Nasdaq: Is Microsoft Stock a Good Buy for 2026?