After years of dominance, Microsoft Corp. (NASDAQ:MSFT) has recently found itself on unfamiliar ground. The stock significantly underperformed its Big Tech peers in 2024 and 2025, and 2026 has started on a weak note as well. Microsoft stock is down roughly 17% year to date, falling from a peak near $555 to around the $400 level, trimming Microsoft’s market capitalization to about $3 trillion.
Despite this slump, Wall Street remains surprisingly optimistic. The average analyst price target for Microsoft stock still sits above $600, implying upside of nearly 50%. This Microsoft stock forecast 2026 raises a key question: can Microsoft overcome its current challenges and deliver that kind of rebound, or are investors underestimating the risks?
Why Microsoft’s Latest Earnings Alarmed Investors
Microsoft’s fiscal Q2 2026 earnings report looked solid on the surface. The company beat expectations on both revenue and earnings. Yet markets reacted sharply, sending the stock down almost 10% in a single session and wiping out more than $350 billion in market value.
One major concern was Microsoft’s accelerating AI spending. Capital expenditures reached $37.5 billion in the quarter, with roughly two-thirds allocated to short-lived assets. To put that in perspective, quarterly capex now exceeds Microsoft’s total annual capex from fiscal 2023. While these investments are designed to secure long-term leadership in artificial intelligence, they are pressuring near-term cash flows. Free cash flow fell to just $5.9 billion during the quarter, intensifying fears about monetization.
Cloud Growth Slows as Azure Faces Constraints
Cloud performance was another sticking point. Microsoft’s total cloud revenue rose 26% year over year to $51.5 billion, crossing the $50 billion quarterly mark for the first time. However, Azure revenue growth slowed to 39%, down from 40% in the previous quarter and slightly below Street expectations.
Management attributed the deceleration to capacity constraints in data centers rather than weakening demand. Still, guidance suggests further moderation ahead, which has unsettled investors accustomed to Azure’s rapid expansion. In the context of this Microsoft stock forecast 2026, sustained cloud growth remains critical to any bullish case.
OpenAI Exposure and Concentration Risk
Perhaps the most controversial disclosure involved Microsoft’s remaining performance obligations (RPOs). The company reported that RPOs more than doubled year over year to $625 billion, but revealed that nearly 45% of that figure is tied to OpenAI.
This level of concentration rattled markets. OpenAI faces intensifying competition from Alphabet Inc. (NASDAQ:GOOGL) and Alphabet Inc. (NASDAQ:GOOG), as well as private rival Anthropic. To meet its massive commitments, OpenAI may need to raise billions more in funding over the next few years. Investors worry that any stumble by OpenAI could ripple through Microsoft’s cloud and AI strategy.
Valuation Reset Improves the Risk-Reward Profile
On the flip side, Microsoft’s valuation has compressed meaningfully. Microsoft stock now trades at a forward price-to-sales ratio of about 8.8x, the lowest level since mid-2023. Its forward price-to-earnings multiple has also declined to roughly 26x, a level many investors view as attractive given Microsoft’s scale, margins, and balance sheet strength.
This valuation reset is a key pillar of the Microsoft stock forecast 2026 argument. Much of the AI optimism appears to have been priced out, potentially limiting downside if growth stabilizes.
Core Businesses Provide Defensive Strength
Beyond AI and cloud, Microsoft’s core businesses continue to generate dependable cash flows. Windows and Office are poised to benefit from a rebound in PC sales, driven by an aging installed base and the emergence of AI-enabled PCs. LinkedIn continues to post low double-digit revenue growth, reinforcing Microsoft’s diversified revenue streams.
Azure’s recent slowdown also appears more supply-driven than demand-driven. If data center capacity catches up, growth could reaccelerate, easing one of the market’s biggest concerns.
Can Microsoft Stock Reach $600?
An eventual public listing of OpenAI could provide Microsoft with an opportunity to monetize part of its stake, even if it remains a long-term strategic partner. Combined with improving valuations, resilient core businesses, and a potential easing of macro uncertainty, the case for recovery is credible.
While risks around AI spending, OpenAI concentration, and cloud growth remain, the Microsoft stock forecast 2026 is not as bleak as recent price action suggests. If execution improves and sentiment stabilizes, a move back toward $600 over the next two years is ambitious—but far from impossible.
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