The market's perception that Microsoft (NASDAQ: MSFT) has fallen behind in artificial intelligence (AI) continues to weigh on the stock. The criticism isn't unwarranted.

Microsoft Copilot simply hasn't become a top AI app for enterprises. That's certainly disappointing, and the company's soaring AI spending hasn't helped matters.

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Microsoft's slide has brought the stock down to 23.5 times trailing 12-month earnings, a level investors seldom get the chance to buy at. Cheap isn't always a buying opportunity. But in Microsoft's case, it's hard to ignore the stock here.

Growth supports the stock's valuation

Just because Copilot hasn't kept up with ChatGPT or Claude doesn't undo the deeply entrenched relationships Microsoft enjoys across the enterprise world.

Microsoft still rakes in high-margin sales hand over fist on its various software products, including Windows, Microsoft 365, Dynamics, and more. Its cloud services arm, Azure, is also thriving. Cloud revenue grew 29% in the third quarter of its fiscal year 2026, and Azure's commercial RPOs (remaining performance obligations) surged 99% to $627 billion.

In other words, Copilot's failure thus far isn't dragging the ship down. Analysts estimate that Microsoft will grow its earnings by an average of 17% annually over the next three to five years. That growth rate would make any stock a table-pounding buy at 23 times earnings, let alone the tech empire and world-class company that is Microsoft.

Just how bad is the hyperscaler cash flow problem?

As a top AI hyperscaler, Microsoft is pouring billions of dollars into data centers and other AI infrastructure. Microsoft is a financial juggernaut that generates more cash from its operations almost every year, including a staggering $170 billion over the past 12 months. But even the deepest pockets have limits. Microsoft might soon find itself with little or no free cash flow, considering its plans to spend $190 billion this calendar year.

It's not an existential crisis by any means, as Microsoft has a fortress-like balance sheet it can tap if it chooses to continue on this path. It does make Microsoft a capital-intensive company for the time being. That reality is a major reason why the stock has struggled. So, should all this AI spending dissuade investors from buying Microsoft stock?