Last week's sell-off pushed the Nasdaq Composite into correction territory. A correction is defined as a drawdown of at least 10% from a high, whereas a bear market is at least 20%. The Nasdaq Composite hit an all-time high in early July, only to evaporate trillions in market cap by the end of the month.
The "Magnificent Seven" -- a term used to describe Apple, Microsoft (MSFT 0.17%), Nvidia, Alphabet, Amazon, Meta Platforms, and Tesla -- has been hit particularly hard by the sell-off. Investors looking to buy the dip in top growth stocks may be wondering which Magnificent Seven stock is the most compelling opportunity.
While you could make a case for each of the seven companies, Microsoft stands out to me. Here's why it's worth considering in August.
Image source: Getty Images.
Microsoft is not overpriced
The sell-off in Microsoft stock pushed the price-to-earnings (P/E) ratio closer to median levels over the short, medium, and long terms. What's more, the forward P/E ratio is nearly the same as the 10-year median -- suggesting that Microsoft would be a particularly good value if the stock price continues to languish and earnings over the next year are as expected.
MSFT PE Ratio data by YCharts
Judging a company based on P/E alone leaves out some important context. Any company can boost earnings in the short term by drastically cutting costs, even if that hurts it in the long run. Microsoft is doing the opposite. It is aggressively ramping up spending to invest in growth even if that means lower earnings in the near term -- which makes its valuation that much more attractive.
Microsoft is investing in growth
As companies mature, they implement capital return programs (dividends and/or stock repurchases) to directly reward shareholders. Capital return programs take the pressure off the need for potential capital gains to be the sole reason for owning a stock.
Microsoft is decades removed from being a young, up-and-coming growth stock. It pays . Its dividend has grown at a compound annual rate of over 10% over the last decade. It also buys back a lot of stock to reduce its outstanding share count and help offset stock-based compensation and potential share dilution.
However, there has been a notable shift in Microsoft's capital allocation in recent years. Microsoft's research and development (R&D) expense and stock buybacks at one time were roughly the same and grew at the same rate, but they have since diverged.
MSFT Stock Buybacks (TTM) data by YCharts
Buybacks are down about 50% in the last two years, while R&D expenses continued to climb. Microsoft is slowing the pace of buybacks to invest in growth -- specifically, cloud and artificial intelligence (AI) offerings.
During the company's fourth-quarter earnings call Microsoft CFO Amy Hood said Microsoft expects capital expenditures to be higher in 2025 than 2024, but operating expenditure would grow in only the single digits. That is expected to keep operating margins in 2025 down only 1 point from 2024, she said.
While some investors may look at the lower buybacks as a red flag, I believe it's a sign Microsoft continues to innovate. Especially in the tech sector, innovation is key to staying relevant. Twenty years ago, Windows was Microsoft's flagship product. Today, cloud infrastructure is arguably the greatest growth catalyst. Microsoft's willingness to accelerate spending is a bold bet that those investments will translate to earnings growth. If they don't, investors will likely scrutinize the company for wasting capital that could have been put toward better endeavors.
Margin to give
The sell-off in Microsoft stock in response to the quarterly print may be due to slowing cloud growth. And while Microsoft's results could be just OK in the near term, the company is doing a good job of focusing on the big picture and making the necessary investments to position the business for sustained growth.
Results have been excellent on the AI front, with Azure AI customers, Copilot generative AI engagement, and AI services all delivering. Microsoft realizes that in order to take market share from Amazon Web Services and Google Cloud -- and to hold off smaller players like Oracle -- it has to give customers compelling reasons to stay within the Azure ecosystem. Its solution is to improve the service through AI investments, which are leading to a lower Microsoft Cloud gross margin.
Now is the time for Microsoft to make these bold investments, because it has the earnings power and profitability needed to take a hit on margins.
MSFT Revenue (TTM) data by YCharts
Microsoft's operating margin and revenue growth have both exploded higher in recent years -- translating to impeccable profitability that has fueled organic growth and the massive capital return program. Microsoft's high operating margin is a critical component of the investment thesis. So, investors certainly don't want to see the trend reverse. However, Microsoft could win in the long run if it sacrifices some profitability in the short term to reinvest in the business, take market share in cloud infrastructure, grow revenue, and then decelerate spending down the line to boost margins.
Like everything in investing, it's a balancing act of spending appropriately and making those investments pay off. The key takeaway is that Microsoft is coming from a position of strength. Reading too much into a quarterly performance misses the big picture of what the company is trying to achieve.
Take a leap with Microsoft
There are plenty of reasons why a stock can stand out as a better buy than others. It can be the valuation, potential earnings growth, or the passive income opportunity, to name a few.
For me, the simplest reason why Microsoft is my top Magnificent Seven stock to buy in August is that I agree with the vision of the company and management's decision-making. Buybacks immediately grow earnings per share by reducing shares outstanding. But if that money could be better deployed in innovation that can grow earnings at a faster rate, then it could be an even greater benefit to shareholders.
Unlike some companies, which may be able to monetize AI in a specific way, Microsoft is developing AI tools for consumers and enterprises across its product categories. In this vein, it is essentially a diversified AI play.
The rise of Microsoft Azure helped the company break out from a period of stodgy growth. And Microsoft could easily rest on its laurels and become even more of a cash cow. But it isn't doing that, choosing instead to seize some of its greatest investment opportunities in decades without hurting the balance sheet or going overboard with leverage.
Now is an exciting time for Microsoft, and investors who agree with its strategy may want to take a closer look at the stock in August.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms, Microsoft, Nvidia, Oracle, and Tesla. 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.
