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The artificial intelligence (AI) rally that propelled U.S. tech stocks higher in 2023 and 2024 and helped the S&P 500 Index ($SPX) post over 20% gains for two consecutive years has now faded. Ever since DeepSeek revealed its ultra-low-cost AI model, attention has instead shifted to China, with names like Alibaba (BABA) rallying smartly and outperforming U.S. tech peers.
While all prominent AI plays – including the once formidable Nvidia (NVDA) – are looking weak as investors weigh the longevity of the trade, Microsoft’s (MSFT) underperformance stands out. The Satya Nadella-led company never revisited its July 2024 highs and is the only constituent of the “Magnificent 7” that hasn’t hit fresh record highs in that timeframe.
MSFT stock was the worst-performing member of the coveted group in 2024, gaining a mere 12%. The stock has also looked weak this year, falling to its 52-week low on March 4 before recovering slightly. In this article, we’ll discuss whether Microsoft stock is a buy now, even as the “AI trade” has withered away. Let’s begin by examining what’s been pulling down the stock in the first place.
Why Has Microsoft Stock Been Dropping?
Microsoft stock has dropped from its July peak for multiple reasons. First, the company hasn’t been able to convince markets about its ability to monetize its outsized AI capex. Despite spending heavily on AI — including a $14 billion investment in OpenAI — Microsoft’s overall revenue and profit growth haven’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.
Secondly, the company’s financial performance has also failed to impress for the last three quarters, and the stock has closed in the red after the releases. Third, DeepSeek’s low-cost AI model has raised concerns over OpenAI’s ability to charge premium pricing for its models. Since Microsoft is the biggest investor in privately held OpenAI, its stock price reflects the apprehensions toward the ChatGPT parent. Last but not least, Microsoft was trading at rich valuations and looked ripe for a correction.
Is MSFT Stock a Buy Now?
Amid the recent correction, Microsoft’s valuations have become a lot more reasonable, and the stock now trades at 29.7x its expected earnings over the next 12 months. MSFT’s valuations are below their 5-year average, although they remain elevated compared to the 10-year average. However, Microsoft is a much different company now than it was 10 years ago.
The company’s revenue stream is diversified and spread across the core Windows and Office franchises, premium subscription products, advertising, cloud, gaming, and LinkedIn. Microsoft is less cyclical than its Magnificent 7 peers and has more consistent cash flows, making it a defensive play.
I believe the worst is nearly over for Microsoft amid the expected rebound in growth. Consensus estimates call for the company's revenue and profit growth to accelerate in the next fiscal year after the slowdown in the current year.
Microsoft expects its capex growth rate in the fiscal year 2026 to be lower than in the current year. CFO Amy Hood said during the fiscal Q2 earnings call that the “mix of spend will begin to shift back to short-lived assets, which are more correlated to revenue growth.” On a related note, recent reports suggest that Microsoft has scaled back its spending on AI data centers. While this suggests that the demand for AI is perhaps not as strong as previously envisioned, Microsoft maintained its guidance of spending $80 billion towards building AI infrastructure this fiscal year. Lower growth in capex coupled with the expected increase in earnings will help fuel Microsoft’s free cash flows in the fiscal year 2026, which would bode well for the stock. Moreover, given the heightened volatility in other Big Tech peers, investors might find some solace in relatively defensive plays like Microsoft.
Microsoft Stock Forecast
Of the 43 analysts covering the stock, 36 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 $508.83 is almost 31% higher than the March 4 closing price, while its Street-high target price of $600 is 54.4% higher. Overall, with reasonable valuations, expectations of a growth rebound, and a possibility of significantly higher free cash flows in the next fiscal year, I find MSFT stock a good buy at these price levels.
