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With gains of just over 12% last year, Microsoft (MSFT) stock underperformed not only other “Magnificent 7” constituents but also the S&P 500 Index ($SPX). 2025 hasn’t looked good for the stock either and it is in the red so far this year. The company’s market capitalization is now just a tad above $3 trillion, and it risks falling out of the coveted club that includes Nvidia (NVDA) and Apple (AAPL).
Microsoft’s second-quarter earnings for its fiscal 2025, released late last month, also spooked investors. While the company’s revenues and profits exceeded estimates, its cloud revenues fell short. To make things worse, the guidance for the current quarter also trailed consensus estimates. Microsoft’s premium valuations did not help matters and it has failed to shed the perception that it’s not able to monetize its massive capex, especially toward artificial intelligence.
Microsoft shares still trade below their July 2024 highs and are in correction territory, having fallen over 10% from their highs. In this article, we’ll examine what’s been plaguing MSFT stock and whether it is finally entering the buy zone.
What’s Wrong with Microsoft Stock?
Microsoft’s sales growth has sagged and its top line grew by 12.3% in the December quarter – the slowest pace of growth since mid-2023. Moreover, its bottom line has risen by just about 10% each for three consecutive quarters. A combination of tepid revenue and earnings growth is seldom good news for investors.
Like its Big Tech peers, Microsoft has also scaled up its AI capex significantly. In a blog post last month, the company said that it plans to invest $80 billion in the current fiscal year to build “AI-enabled datacenters to train AI models and deploy AI and cloud-based applications around the world.”
In its fiscal Q2 earnings call, Microsoft said that its annualized run rate for its AI business is now at $13 billion. However, despite spending heavily on AI – including a $14 billion investment in OpenAI – Microsoft’s overall revenue and profit growth hasn’t grown proportionately. If anything, sales growth has fallen to multi-quarter lows while higher depreciation expenses on AI investments and its share of losses in OpenAI have taken a toll on its profitability.
Notably, much of Microsoft’s current capex is directed toward projects that should pay off over the long term. This means that while the monetization will be slow and gradual. these investments will be a drain on its cash flows and profitability in the near term.
MSFT Stock Forecast: Analysts Trimmed Their Targets
Sell-side analysts remain bullish on Microsoft and of the 42 analysts covering the stock, 35 rate it as a “Strong Buy.” Four analysts rate MSFT as a “Moderate Buy” and three as a “Hold.” Microsoft’s mean target price of $509.90 is 23.4% higher than the Feb. 5 closing price while its Street-high target price of $600 is 45.2% higher.
Several analysts trimmed Microsoft’s target price following the company’s fiscal Q2 earnings release. Mizuho for instance cut its target price by $10 to $500 while maintaining its “Overweight” rating. Morgan Stanley also cut MSFT’s target price by $10 to $530 while UBS lowered it from $525 to $510.
Does Microsoft Stock Look Like a Buy Now?
After the massive underperformance over the last year, is the worst over for MSFT? To begin with, Microsoft’s valuations have started to look somewhat reasonable now. The stock trades at 30x its expected earnings over the next 12 months, which is a slight discount to its average multiple over the last five years.
Analysts expect Microsoft’s revenue and profit growth to accelerate in the next fiscal year after the slowdown in the current year. The company’s capex growth should also come down in the next fiscal year and spending should become tilted toward projects that will show quick results. As Microsoft CFO Amy Hood said during the fiscal Q2 earnings call, the “mix of spend will begin to shift back to short-lived assets, which are more correlated to revenue growth.”
However, Microsoft remains a “show me story,” as I noted in a previous article. The company needs to show markets that it can monetize its AI investments and get more consumers to pay for its AI products and services. Importantly, the massive capex should ideally lead to higher margins on AI services compared to traditional services, or else the company’s profits would remain subdued.
All said, MSFT’s risk-reward is now looking much more balanced at these prices. While it is still not a screaming buy, it would make sense to start nibbling at these price levels.
