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Microsoft (MSFT) was the worst-performing “Magnificent 7” stock in 2024 and the only member of the coveted group that underperformed the S&P 500 Index ($SPX). Unsurprisingly, Nvidia (NVDA) was the best performer of the lot, followed by Meta Platforms (META). MSFT stock is down roughly 10% from its 2024 highs and is in correction territory. In this article, we’ll explore why Microsoft stock has been underperforming and whether the tech giant can reward investors in 2025.
Why Did MSFT Stock Underperform in 2024?
To be sure, 2024 started on a positive note for MSFT stock, and by mid-January, it edged past Apple (AAPL) to become the world’s biggest company. By March, Microsoft had extended its lead over Apple by $400 billion. While the iPhone maker had a tepid first half, Microsoft looked strong and hit all-time highs in July.
However, since then, MSFT stock has looked to be on shaky ground. Firstly, there are concerns over its growing capital expenditure toward artificial intelligence (AI). On a related note, markets are apprehensive about the company’s ability to monetize its AI investments.
Secondly, there is uncertainty over Microsoft’s relationship with ChatGPT-parent OpenAI, which is now transforming into a for-profit enterprise. There have been concerns over “safe” AI development at OpenAI, and the company has disbanded some of its safety teams. Notably, Jan Leike, who co-headed Superalignment at OpenAI – a now dissolved team that focused on safety – left the company. In a series of X posts, he talked about “disagreements” with OpenAI leadership over the company’s “core values.”
Elon Musk, who is one of President-elect Donald Trump’s key advisors, has backed AI regulations and warned against the technology going rogue. The Tesla (TSLA) CEO does not share the best of relations with OpenAI – a company that he cofounded – as well as with its CEO Sam Altman. Unsurprisingly, MSFT was among those tech stocks that underperformed following Trump’s election.
Finally, in light of the several headwinds, Microsoft’s valuations started to look a bit frothy. It still trades at almost 32x the expected earnings over the next 12 months, and multiples are higher than what they averaged over the last 3 years.
Microsoft Stock Forecast
Sell-side analysts have also turned incrementally bearish on MSFT stock over the last three months, although they do still have a consensus rating of “Strong Buy” on shares. Microsoft’s mean target price of $508.31 is over 21% higher than Jan. 2 closing prices while its Street-high target price of $600 is over 43% higher.
Microsoft Is a ‘Show Me’ AI Story
Microsoft looks like a “show me” AI story to me. While some of its fellow Big Tech peers like Meta Platforms and Amazon (AMZN) have started to reap the rewards of their AI investments and Nvidia is literally minting money selling AI chips, Microsoft is yet to meaningfully monetize its AI investments. Notably, Apple which was arguably late to the AI party, was the second-worst-performing Magnificent 7 constituent last year. The sales of its “Apple Intelligence”-powered iPhones haven’t really taken off, which is a sign that end consumers perhaps don’t share the same euphoria toward AI and AI-powered devices as the investing community.
Coming back to Microsoft, 2025 might be the year when 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. While these are still early days, some doubt that the Satya Nadella-led company will be able to make higher margins on AI subscriptions than on traditional products.
Should You Buy MSFT Stock?
Overall, I believe that at least in the short-term, Microsoft’s valuations leave little on the table for investors. However, if the company can impress markets through effective monetization of its massive AI capex it would deserve a rerating. I would continue to stay on the sidelines on Microsoft and wait for better prices before adding more shares.
