Microsoft (NASDAQ:MSFT) stock has underperformed in 2024, with just a 12% gain, lagging behind other tech giants and the S&P 500 Index ($SPX). Despite a robust market capitalization nearing $3 trillion, Microsoft is at risk of losing its spot among the elite companies that include Nvidia (NASDAQ:NVDA) and Apple (NASDAQ:AAPL). But with 2025 looking uncertain, is it time for investors to reevaluate Microsoft stock? This article explores the reasons behind MSFT’s underperformance and the potential for recovery.
What’s Behind the Underperformance of Microsoft Stock?
Microsoft’s recent earnings report for Q2 of fiscal 2025 has left investors concerned. While revenues and profits exceeded expectations, the company’s cloud revenue fell short. Furthermore, its forecast for the upcoming quarter was also weaker than anticipated. This disappointment occurred despite Microsoft’s massive investments in artificial intelligence (AI) and its impressive market presence.
Sales growth has slowed, with the company experiencing its slowest pace of growth in the December quarter since mid-2023. Despite strong AI investments, including $80 billion allocated to build AI-enabled data centers, Microsoft’s revenue and profit growth have been sluggish. Its sales growth has fallen to multi-quarter lows, and higher depreciation expenses related to AI investments, along with losses in OpenAI, have dampened profitability.
Microsoft’s AI Investments and Long-Term Strategy
Much of Microsoft’s capital expenditures (capex) are being directed toward long-term AI projects. The company’s fiscal Q2 earnings call revealed that Microsoft’s annualized run rate for its AI business is now at $13 billion. However, these AI investments are not expected to yield immediate returns, and this slow monetization could hurt cash flows and profitability in the short term.
The AI strategy has raised investor expectations, but the benefits of these investments are anticipated to materialize gradually. Microsoft’s focus on AI, though promising, has yet to deliver the revenue boost many had hoped for.
Analysts’ Microsoft Stock Forecast: A Mixed Outlook
Despite the current underperformance, analysts remain generally optimistic about Microsoft’s prospects. Of the 42 analysts covering the stock, 35 rate it as a “Strong Buy,” while four rate it as a “Moderate Buy” and three as a “Hold.” Microsoft’s mean target price is $509.90, representing a 23.4% upside from its Feb. 5 closing price. The Street-high target price is $600, which would signify a 45.2% potential upside.
However, following the Q2 earnings release, several analysts adjusted their target prices. Mizuho lowered its target by $10 to $500 while maintaining an “Overweight” rating. Similarly, Morgan Stanley reduced its target by $10 to $530, and UBS dropped its target from $525 to $510.
Is Microsoft Stock a Buy Now?
After a year of underperformance, is it finally time to buy Microsoft stock? The stock is currently trading at 30 times its expected earnings over the next 12 months, which is a slight discount compared to its five-year average multiple. Analysts are projecting revenue and profit growth to pick up in the next fiscal year, and Microsoft’s capex growth is expected to slow down, with more focus on projects that can deliver quicker results.
As Microsoft CFO Amy Hood indicated during the Q2 earnings call, the company’s spending mix will begin shifting towards short-lived assets, which are more directly correlated with revenue growth. This could provide a much-needed boost to Microsoft’s financials.
Despite the long-term potential of its AI investments, Microsoft remains a “show me” story. The company needs to prove it can successfully monetize its AI products and services, generating sufficient consumer demand. If Microsoft can achieve higher margins from AI compared to traditional services, the company’s profitability could improve significantly.
The Bottom Line: Microsoft Stock’s Risk-Reward Profile
At current levels, Microsoft’s risk-reward profile appears much more balanced. While it may not be an obvious “buy” right now, investors may find value in starting to accumulate MSFT shares at these price levels. The stock may still face volatility in the near term, but its AI investments could eventually pay off, leading to greater profitability down the road.
In summary, while Microsoft stock may not be a screaming buy, the current price levels present a potentially attractive entry point for long-term investors who believe in the company’s AI strategy and future growth.
Featured Image: Pixabay©efes
