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On Fri, 17 Jan, 4:03 PM UTC
2 Sources
[1]
Microsoft's Stock Revival Hinges on Showing Growth From AI Binge
Microsoft Corp. has plowed tens of billions of dollars into artificial intelligence. With its stock struggling, the key question is how quickly those investments can prove to be successful. The worst performer among the Magnificent Seven since hitting a record in July, Microsoft shares have stumbled under the weight of ambitious spending and signs that adoption of its AI services has been slower than hoped. The cooling hype risks leaving the stock vulnerable, given it trades at an elevated multiple.
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Microsoft's Stock Revival Hinges on Showing Growth From AI Binge
(Bloomberg) -- Microsoft Corp. has plowed tens of billions of dollars into artificial intelligence. With its stock struggling, the key question is how quickly those investments can prove to be successful. The worst performer among the Magnificent Seven since hitting a record in July, Microsoft shares have stumbled under the weight of ambitious spending and signs that adoption of its AI services has been slower than hoped. The cooling hype risks leaving the stock vulnerable, given it trades at an elevated multiple. "The market is coming to a realization that AI adoption will take longer, and that expectations for near-term returns have gotten out of line," said Tim Pagliara, chief investment officer at Capwealth Advisors. While "Microsoft is really pushing AI, it has to prove the concept at a time when it also has huge capex plans and the stock is fully valued by historical standards." The stock is around 10% below its record high set in July and its gain since the start of 2024 has underperformed that of the Nasdaq 100 Index in that time. This reflects scrutiny on the firm's heavy AI-related spending, especially as investors seek a more pronounced payoff. Microsoft's capital expenditures this fiscal year include tens of billions of dollars on data centers. The next read on these trends will come toward the end of the month, when the company delivers second-quarter results. The past two reports have both disappointed, with a tepid growth forecast for its Azure cloud-computing business last quarter and a slowdown in Azure in the previous one. Slower adoption would further obscure when Microsoft could see a return on its AI investment. "Google Gemini, ChatGPT, and Meta AI are significantly more popular among consumers relative to Microsoft Copilot" or other services, according to Wedbush's quarterly consumer internet survey. It noted that 13% of those surveyed indicated they used Microsoft's Copilot in the past three months, compared with 25% for Gemini. Microsoft has twice rebranded its main chatbot for businesses, as part of an effort to persuade people to use it. Morgan Stanley analysts wrote that this "might be perceived as a reaction to tepid adoption of the existing paid Microsoft 365 Copilot offering." On Thursday, the company announced a 30% price hike for its suite of Office apps, which come with access to AI tools. Even if the pace of AI adoption is slower than hoped for, Microsoft remains a consensus favorite on Wall Street. More than 90% of the analysts tracked by Bloomberg recommend buying the stock, and the average analyst price target points to upside of almost 20% over the coming 12 months, the highest return potential among the Magnificent Seven, except for Nvidia Corp. Bank of America expects software will outperform this year, and named Microsoft as one of its top picks, saying it is the "best positioned" for the AI cycle across infrastructure and applications. Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management, also has a positive outlook. "While AI revenues are likely to again lag behind capex in 2025, we see evidence that AI monetization is primed to improve sharply in 2025," she wrote earlier this month about big tech stocks. "Strong underlying earnings per share growth should be enough to support solid near-term share price performance." Revenue at Microsoft is expected to grow about 14% this fiscal year. Earnings are also seen expanding at a double-digit pace for the next several years. The question is whether that's enough to provide a floor under the valuation. Shares trade around 30 times estimated earnings, and while the multiple recently touched its lowest in more than a year, it is above its long-term average of about 25. "AI adoption is the question on everyone's mind, but we still find the stock highly attractive given its growth," said Christopher Ouimet, a portfolio manager at Logan Capital Management. "Some traders are focused on short-term growth trends with AI or Azure, but the long-term picture seems clear. AI adoption might not be linear, but it should end up being massive." Tech Chart of the Day Apple Inc. fell 4% on Thursday, the biggest one-day percentage drop for the iPhone maker since August. The stock has come under pressure in 2025 amid concerns over iPhone sales and weakness in the critical Chinese market. Apple is down nearly 9% this year, compared with a gain of 0.4% for the Nasdaq 100.
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Microsoft's heavy investments in AI are under the microscope as the company's stock performance lags behind expectations, raising questions about the pace of AI adoption and return on investment.
Microsoft Corporation, a tech giant known for its ambitious artificial intelligence (AI) investments, is facing increased scrutiny as its stock performance struggles to keep pace with market expectations. The company has invested tens of billions of dollars into AI technology, but the slow adoption rate of its AI services has raised concerns among investors and analysts 1.
Since reaching a record high in July, Microsoft's stock has become the worst performer among the "Magnificent Seven" tech companies. The stock is currently trading around 10% below its peak, underperforming the Nasdaq 100 Index since the start of 2025 2. This decline reflects growing investor concern over the company's substantial AI-related spending and the slower-than-anticipated adoption of its AI services.
Microsoft's AI offerings, particularly its Copilot service, are facing stiff competition in the consumer market. According to a Wedbush quarterly consumer internet survey, only 13% of respondents reported using Microsoft's Copilot in the past three months, compared to 25% for Google's Gemini 2. This disparity in adoption rates has led Microsoft to rebrand its main chatbot for businesses twice, in an effort to boost user engagement.
Despite these challenges, Microsoft remains a favorite among Wall Street analysts. Over 90% of analysts tracked by Bloomberg recommend buying the stock, with an average price target suggesting a potential upside of almost 20% over the next 12 months 2. The company's revenue is expected to grow by about 14% this fiscal year, with earnings projected to expand at a double-digit pace for several years.
Microsoft's current valuation has raised some eyebrows. The stock trades at around 30 times estimated earnings, which is above its long-term average of about 25 2. This elevated multiple, combined with the cooling AI hype, has left the stock potentially vulnerable to market fluctuations.
While short-term AI adoption trends may be concerning, many analysts and investors remain optimistic about Microsoft's long-term prospects. Christopher Ouimet, a portfolio manager at Logan Capital Management, stated, "AI adoption might not be linear, but it should end up being massive" 2. This sentiment reflects a broader belief in the eventual payoff of Microsoft's substantial AI investments.
As Microsoft prepares to release its second-quarter results later this month, all eyes will be on the company's ability to demonstrate tangible returns on its AI investments and maintain its position as a leader in the rapidly evolving tech landscape.
Reference
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Microsoft's stock struggles as AI investments fail to yield immediate returns, causing investor reassessment amid broader market challenges and emerging competition in the AI space.
2 Sources
2 Sources
Microsoft's stock performance lags behind expectations as investors show signs of AI fatigue and concerns over the company's high valuation multiple. Despite the tech giant's strong position in the AI market, these factors are hindering a potential rebound.
2 Sources
2 Sources
Microsoft's recent earnings report reveals slower cloud growth and higher AI spending, raising investor concerns amid intensifying competition from Chinese AI startups like DeepSeek.
5 Sources
5 Sources
Microsoft's Azure cloud service experiences a growth deceleration, causing investor unease. The tech giant's AI investments and future outlook remain in focus as the company navigates changing market dynamics.
15 Sources
15 Sources
Microsoft reports strong Q1 FY25 results, with revenue up 16% to $65.6 billion, driven by cloud computing, AI initiatives, and gaming. The company's AI business is on track to exceed $10 billion in annual revenue.
48 Sources
48 Sources
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