Microsoft's AI Ambitions Face Headwinds Amid Global Trade Tensions and Market Volatility

Down 18%, Is Microsoft Stock a Buy on the Dip Before April 30? | The Motley Fool

On April 2, President Donald Trump announced plans to impose a series of tariffs on imported goods from America's trading partners, which sparked fears of a global trade war and an economic slowdown. Investors have shunned stocks in favor of safe-haven assets like cash, so the S&P 500 (^GSPC 0.13%) is currently down 14% from its record high. The tech-heavy Nasdaq-100 is down by almost 18%. History proves the U.S. stock market always climbs to new highs over the long term, so the recent declines might give investors a great opportunity to buy some of America's highest-quality stocks at a discount. Microsoft (MSFT -1.13%) is one that comes to mind. The company has a track record of success that spans decades, and it's now a leader in the emerging artificial intelligence (AI) space, which could be one of its most valuable opportunities ever. Microsoft stock is down 18% amid the sell-off in the broader market. However, the company is scheduled to release its financial results for its fiscal 2025 third quarter (ended March 31) on April 30, which will give investors an update on its AI progress. It could be the catalyst that sparks a recovery in Microsoft stock, so should investors buy the dip ahead of the report? Microsoft has invested around $14 billion in OpenAI since 2016, which is the company behind the ChatGPT chatbot. Microsoft used some of OpenAI's latest models to create its own AI virtual assistant called Copilot, which it integrated for free into some of its popular software products like the Windows operating system, Bing search engine, and Edge internet browser. Copilot is also available as a paid add-on for subscribers to the 365 productivity suite, which includes apps like Word, Excel, PowerPoint, and Outlook. Microsoft says businesses around the world pay for over 400 million 365 licenses for their employees, and since the Copilot add-on is around $30 per license, per month, it could become a multibillion-dollar recurring revenue stream over the long term. During the fiscal 2025 second quarter (ended Dec. 31), customers were using Copilot 60% more frequently than they were in the first quarter just three months earlier. Plus, Microsoft said the customers who added Copilot when it first became available 18 months earlier had collectively expanded their licenses tenfold. Then there is Copilot Studio, which allows businesses to create their own custom AI agents. These agents can do everything from taking notes during meetings, to handling customer inquiries on the business's website. Microsoft said customers created over 400,000 agents during Q2, which was double the amount they created three months earlier in Q1. Simply put, Copilot demand is soaring on multiple fronts, so investors should keep an eye out for further updates on April 30. While Copilot is a very promising product for Microsoft, the Azure cloud platform is at the heart of the company's AI strategy. Azure operates state-of-the-art centralized data centers that are filled with chips from leading suppliers like Nvidia, and it rents the computing capacity to businesses to help them develop and deploy AI software. Businesses can also access a host of ready-made large language models (LLMs) on Azure, including those from OpenAI, which they can use to accelerate the development of their AI projects. Azure is consistently one of the fastest growing parts of Microsoft's entire business, and Azure AI is becoming a major contributor to that growth. Azure AI revenue soared by a whopping 157% year over year during Q2, accounting for 13 percentage points of Azure's overall revenue growth of 31% during the quarter. As a result, Azure AI will be a primary point of focus for Wall Street when Microsoft releases its Q3 results on April 30. Investors will also be watching Microsoft's capital expenditures very closely. The company is on track to spend over $80 billion on AI data center infrastructure and chips during fiscal 2025, but the disruptions to global trade caused by tariffs and other economic policies might force the company to pull back. Spending less money on AI infrastructure could put the brakes on Azure AI's growth, because demand for more computing capacity still exceeds the available supply of data centers. The recent 18% dip in Microsoft stock has created an enticing buying opportunity for investors, because it now trades at a price-to-earnings (P/E) ratio of 29.6, which is an 11% discount to its five-year average of 33.2: As a result, Microsoft stock might be a great buy right now regardless of the upcoming earnings report on April 30. Given the company's stellar track record of success, one single quarter probably won't impact its long-term outlook, so investors might want to view the recent dip in its stock as a solid entry point for a long-term position. PwC estimates AI could add $15.7 trillion to the global economy by 2030, and since Microsoft is one of the clear leaders in the industry, investors could do very well by owning its stock over the next five or six years. Microsoft also might weather the recent trade tensions better than most companies, because it mainly sells software and digital services. Tariffs are typically imposed on physical imports into a given country, so most of Microsoft's products have avoided direct penalties -- at least so far. The company will face indirect impacts if the global economy slows down because that might shrink demand for things like Copilot and Azure AI services, but this would probably be a short-term phenomenon as several countries are already negotiating trade deals with the U.S.

Analyst unveils surprising Microsoft stock price target after tariff slump

In an environment where recession warnings are growing louder, even Microsoft isn't untouchable. Since late 2022, Microsoft has led the charge in AI infrastructure, thanks to its multibillion-dollar partnership with OpenAI. The race to dominate generative AI sparked a frenzy in data center development, GPU acquisition, and global capacity expansion. But in recent weeks, that expansion has shown signs of slowing. Don't miss the move: Subscribe to TheStreet's free daily newsletter "We may strategically pace our plans," Microsoft's Head of Cloud Operations Noelle Walsh wrote in a LinkedIn post earlier this month. She said Microsoft had undertaken the "largest and most ambitious infrastructure scaling project" in its history but would now be "slowing or pausing some early-stage projects." In the past six months, Microsoft has pulled back from more than two gigawatts of AI cloud capacity across the U.S. and Europe, analysts at TD Cowen noted. In Ohio, a $1 billion data center was recently shelved. Still, analysts say this is less about abandoning AI and more about shifting from the costly infrastructure buildup toward more selective investments. "Over the past few quarters, Microsoft has 'overspent' on land and buildings but is now going back to a more normal cadence," Barclays analyst Raimo Lenschow wrote, according to Business Insider. Image source: Sokolow/picture alliance via Getty Images Compared to Nvidia, Apple (AAPL) , and Tesla, Microsoft is less exposed to tariff impact as it doesn't deal much in physical or consumer products. Related: Veteran fund manager resets Nvidia stock price target after shocking export news In Microsoft's fiscal year 2024, its cloud segment, which includes Azure, was the company's largest revenue contributor, generating about 43% of the company's total revenue. What's more, Microsoft's focus on enterprise customers means that a big portion of its revenue streams is tied to long-term contracts, giving Microsoft extra stability. Still, Microsoft isn't entirely immune to the pressures. In its latest-reported quarter ended December 2024, Microsoft posted earnings per share of $3.23 on revenue of $69.6 billion, both topping consensus estimates. But growth in Azure, Microsoft's AI-focused cloud platform, came in softer than expected, and the company's revenue outlook for the current quarter fell short of forecasts. Revenue from Azure and related cloud services rose 31% year over year, slightly below the 33% growth reported in the previous quarter. Microsoft expects $67.7 billion to $68.7 billion in fiscal third-quarter revenue compared with the $69.78 billion consensus. The company is set to report earnings for its fiscal third quarter on April 30 after market close. Analyst calls Microsoft a 'defensive asset' Citi analysts led by Tyler Radke lowered the firm's price target for Microsoft to $480 from $497 while maintaining a buy rating, according to a research note on April 17. The price cut aligned with Citi's view for a broader economic slowdown, with analysts moderating estimates broadly by roughly 3 points across Microsoft's three key segments. Related: Billionaire Bill Ackman delivers frank 3-word message on tariff war For the March quarter, Citi projects Azure growth will land at the lower end of its 31% guidance, with potential for further slowdown in the fourth-quarter guidance. More Tech Stocks: Revenue from Microsoft's Intelligent Cloud, including Azure, accounted for roughly 37% of the company's total revenue in the December quarter. "Despite this incremental caution, the decline post Q2 results provides a more palatable entry point, and we continue to view MSFT as a more defensive asset within large cap tech," the analyst wrote. Related: Veteran fund manager unveils eye-popping S&P 500 forecast