Shares in the software giant have been struggling for months, as repeated earnings disappointments have caused a reassessment of when the tens of billions of dollars it has plowed into AI-related investments will show up more clearly in improved earnings and growth.
While Wall Street analysts remain almost uniformly optimistic about its long-term potential, and the stock’s decline has diminished much of its valuation premium, positive near-term catalysts appear limited, especially against a backdrop of rising political uncertainty and weaker economic data, which have tanked markets broadly.
“Microsoft is the poster child for consistent cash flow, predictable earnings, and subscription-based revenue that isn’t cyclical like chips are, but even it hasn’t provided any immunity from the market at large,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott. “There were all these arguments that AI would improve productivity and be monetized with copious amounts of profitability, but that’s become a real show-me situation.”
Among the Magnificent Seven stocks, Microsoft has gone the longest without hitting a fresh record. It’s down about 17% from the peak hit in July, and closed at its lowest since January 2024 on Monday. The stock’s negative performance over the past six months stands in stark contrast to the gains posted by both the Nasdaq 100 Index and an exchange-traded fund that tracks the software sector over the same period.
Microsoft’s results in late January underlined both why it has lately failed to excite investors, and also why few are throwing in the towel. The report featured underwhelming growth in its Azure cloud-computing business, even if some of the disappointment was a product of the company not having enough data centers to handle demand. And while it showed growth in its AI services, efforts to monetize those products have gone more slowly than many investors anticipated.
The lack of a hoped-for AI inflection has been a theme, and January’s was the third straight quarterly report to be followed by a negative stock reaction, the longest such streak in more than a decade, according to data compiled by Bloomberg.
Compounding the disappointment is the fact that Microsoft continues to spend heavily on AI, with capital expenditures ballooning. It expects to spend $80 billion this fiscal year on AI data centers, although TD Cowen recently wrote that the company has canceled some leases for US data center capacity.
Microsoft is one of several companies focused on AI that have struggled since the emergence, in January, of the Chinese AI startup DeepSeek, which claimed to have found a more efficient way to create its AI models, and one that requires fewer high-powered servers and computing chips.
Chipmaker Nvidia Corp. is among the hardest hit member of the Magnificent Seven, but Microsoft has come under scrutiny because of its partnership with ChatGPT-maker OpenAI, which competes directly with DeepSeek.
“There’s a real question mark about OpenAI’s ability to pivot amid DeepSeek, and while Microsoft’s connection to OpenAI should ultimately be a good thing, I think the question takes a few points off Microsoft’s valuation as it gets sorted out,” said Michael Kirkbride, portfolio manager at Evercore Wealth Management.
The valuation has already come down significantly. Shares currently trade below 27 times forward earnings, the lowest in nearly two years and well below a July peak of 35. The multiple is only modestly above its 10-year average of about 26.
Despite the lack of a meaningful near-term uplift from AI, Wall Street remains positive about the company’s ability to generate growth from the technology over time. Analysts expect Microsoft’s revenue to grow about 13% in fiscal year 2025, and accelerate in each of the next two fiscal years. Net earnings are seen rising 11% this fiscal year before also accelerating over the subsequent two.
That kind of durable growth is a key reason why more than 90% of the analysts tracked by Bloomberg recommend buying. In addition, it trades 30% below the average analyst price target, the biggest such discount in more than two years.
Arup Datta, portfolio manager at Mackenzie Investments, is among those who maintains a positive view on shares.
“Microsoft and other Mag 7 names had gotten ahead of themselves, but there’s a lot more valuation support now that it has come in, and shares even look a little cheap compared with peers,” he said. “At the same time, its quality characteristics have always been and continue to be stellar. It’s tremendously innovative and continues to have very robust long-term growth potential, which means it looks very healthy from where it sits today.”
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