Microsoft’s Current Stock Situation
Since peaking last fall, Microsoft has seen its stock price drop by over 25%. This decline has been driven by concerns that emerging generative artificial intelligence software might render Microsoft’s costly enterprise software suite outdated. Analysts are now reevaluating the worth of Microsoft’s profits, contributing to the stock’s downturn as we look ahead to 2026. Moreover, the second-quarter earnings report released in January indicated a significant rise in expenses related to AI data centers, while revenue from its Azure cloud computing division did not show similar growth.
There are certainly valid worries regarding Microsoft, which adds to the risk for anyone considering buying the stock right now. Investors might wonder whether current prices really match the investment risks or if the market’s reaction is exaggerated, presenting a golden buying chance. It’s worth pondering, really.
Major Risks for Microsoft
Despite the stock sell-off over recent months, analysts are largely optimistic about Microsoft’s future. They project that earnings per share will rise by 23% within the next year. While a slowdown is anticipated in 2027, earnings growth is still expected at around 13% that year.
Right now, the company’s price-to-earnings ratio stands at 24, indicating a potentially attractive buying level. So, it’s a bit of a fork in the road: Is Microsoft a savvy investment today, or are analysts simply adjusting their expectations?
One significant factor behind this decline has been Azure’s underwhelming performance. Microsoft ramped up its spending on the cloud computing platform to $37.5 billion last quarter, yet revenue growth remained stagnant at around 38% when adjusted for constant currency.
Management noted that Azure’s growth is hampered by a decision to allocate more servers to internal AI projects, limiting the company’s ability to fulfill customer demand.
There are concerns as well regarding the prospects of AI development. Currently, Microsoft has around 15 million subscribers for its Copilot tool within the Microsoft 365 suite, which is just a small fraction of its 450 million commercial customers.
Another crucial risk to keep in mind is the concentration risk from Microsoft’s partnership with OpenAI. This multi-year agreement, which was signed in October and is valued at $250 billion, accounts for a significant portion of Microsoft’s $625 billion backlog. However, given OpenAI’s status as a high-risk entity that often operates at a loss, much of that revenue isn’t guaranteed.
Potential Upsides in the Current Risks
Nonetheless, Microsoft is well-positioned as a leader in artificial intelligence investment, particularly in its own data centers and software development.
The risk of massive overbuilding in data centers is somewhat mitigated by Microsoft’s stronghold in enterprise computing with products like Windows and the ongoing transition to cloud solutions. Azure serves as an appealing option for businesses migrating their workloads to the cloud, and even though this differs from AI training, the chances of overextending in AI seem minimal. Hence, it’s unlikely that Microsoft’s spending and customer focus will drastically impact its revenue multiples.
Furthermore, large enterprises have rarely transitioned away from Microsoft’s Office and Dynamics software, despite alternatives being available. The barrier to leaving Microsoft’s ecosystem remains quite significant. In fact, it’s anticipated that the adoption of AI services in Microsoft 365 will increase rather than decline over the next few years. The upcoming release of a new enterprise software package, E7, planned for May, aims to boost both adoption and revenue from AI services.
It’s worth noting that future software updates are expected to demand more computational resources to enhance Copilot and support greater user engagement, which could explain why resources have been redirected away from Azure. If management’s projections hold true, this could yield a favorable return on investment over time.
We believe Azure’s robust growth is likely to persist, potentially accelerating in the latter half of this year due to increased spending. The high-margin productivity and business processes section, encompassing Microsoft 365 and Dynamics 365, may also enjoy a lift from AI features bundled into new packages set to launch in FY2027.
In light of these insights, analyst expectations appear aligned with underlying business realities, suggesting Microsoft stock could represent a compelling investment opportunity.
