(Bloomberg) -- Microsoft Corp. has plowed tens of billions of dollars into artificial intelligence. With its stock struggling, the key question is how quickly those investments can prove to be successful.
The worst performer among the Magnificent Seven since hitting a record in July, Microsoft shares have stumbled under the weight of ambitious spending and signs that adoption of its AI services has been slower than hoped. The cooling hype risks leaving the stock vulnerable, given it trades at an elevated multiple.
“The market is coming to a realization that AI adoption will take longer, and that expectations for near-term returns have gotten out of line,” said Tim Pagliara, chief investment officer at Capwealth Advisors. While “Microsoft is really pushing AI, it has to prove the concept at a time when it also has huge capex plans and the stock is fully valued by historical standards.”
The stock is more than 7% below its record high set in July and its gain since the start of 2024 has underperformed that of the Nasdaq 100 Index in that time. The stock rose 1.9% on Friday, participating in a broad-based rally.
This reflects scrutiny on the firm’s heavy AI-related spending, especially as investors seek a more pronounced payoff. Microsoft’s capital expenditures this fiscal year include tens of billions of dollars on data centers.
The next read on these trends will come toward the end of the month, when the company delivers second-quarter results. The past two reports have both disappointed, with a tepid growth forecast for its Azure cloud-computing business last quarter and a slowdown in Azure in the previous one.
Slower adoption would further obscure when Microsoft could see a return on its AI investment. “Google Gemini, ChatGPT, and Meta AI are significantly more popular among consumers relative to Microsoft Copilot” or other services, according to Wedbush’s quarterly consumer internet survey. It noted that 13% of those surveyed indicated they used Microsoft’s Copilot in the past three months, compared with 25% for Gemini.
Microsoft has twice rebranded its main chatbot for businesses, as part of an effort to persuade people to use it. Morgan Stanley analysts wrote that this “might be perceived as a reaction to tepid adoption of the existing paid Microsoft 365 Copilot offering.”
On Thursday, the company announced a 30% price hike for its suite of Office apps, which come with access to AI tools.
Even if the pace of AI adoption is slower than hoped for, Microsoft remains a consensus favorite on Wall Street. More than 90% of the analysts tracked by Bloomberg recommend buying the stock, and the average analyst price target points to upside of almost 20% over the coming 12 months, the highest return potential among the Magnificent Seven, except for Nvidia Corp.
Bank of America expects software will outperform this year, and named Microsoft as one of its top picks, saying it is the “best positioned” for the AI cycle across infrastructure and applications.
Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management, also has a positive outlook.
“While AI revenues are likely to again lag behind capex in 2025, we see evidence that AI monetization is primed to improve sharply in 2025,” she wrote earlier this month about big tech stocks. “Strong underlying earnings per share growth should be enough to support solid near-term share price performance.”
Revenue at Microsoft is expected to grow about 14% this fiscal year. Earnings are also seen expanding at a double-digit pace for the next several years.
The question is whether that’s enough to provide a floor under the valuation. Shares trade at more than 30 times estimated earnings, and while the multiple recently touched its lowest in more than a year, it is above its long-term average of about 25.
“AI adoption is the question on everyone’s mind, but we still find the stock highly attractive given its growth,” said Christopher Ouimet, a portfolio manager at Logan Capital Management. “Some traders are focused on short-term growth trends with AI or Azure, but the long-term picture seems clear. AI adoption might not be linear, but it should end up being massive.”
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Apple Inc. fell 4% on Thursday, the biggest one-day percentage drop for the iPhone maker since August. The stock has come under pressure in 2025 amid concerns over iPhone sales and weakness in the critical Chinese market. Apple is down nearly 8% this year, compared with a gain of 1.9% for the Nasdaq 100. Apple rose 1.3% on Friday.
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