Microsoft (MSFT) has experienced a challenging year, with a year-to-date gain of approximately 15%, falling short of both the S&P 500 Index and the Nasdaq Composite Index. Under the leadership of Satya Nadella, the tech giant has also struggled in 2024, achieving only 12% growth, significantly less than its technology peers and the broader market. The underperformance is notable, especially given that the so-called “Magnificent 7,” which includes major tech firms, failed to deliver strong returns, with none making it to the list of the top 20 gainers in the S&P 500 Index for 2025.
Despite these setbacks, Dan Ives of Wedbush Securities maintains a positive outlook for Microsoft, predicting the stock could rise to $625 next year. He labels it a “compelling buy,” highlighting its relatively high dividend yield of 0.75%, the highest among its Magnificent 7 counterparts. Microsoft is on the verge of becoming a Dividend Aristocrat, reflecting its commitment to returning value to shareholders.
Challenges and Opportunities in AI Investment
The company’s struggles in 2025 can largely be attributed to concerns over its increasing capital expenditures (capex) related to artificial intelligence (AI). Initially, Microsoft indicated a decline in capex growth for fiscal year 2026; however, it has since revised this outlook, reporting a record expenditure of nearly $35 billion in the first quarter of fiscal year 2026, which ended in September. This trend is not unique to Microsoft, as competitors like Amazon, Meta Platforms, and Alphabet have also ramped up their spending in the ongoing AI arms race.
The competitive landscape has put pressure on Microsoft, particularly as Alphabet’s advancements with its Gemini AI have taken market share from OpenAI, where Microsoft is a major investor. This dynamic has contributed to the perception of Microsoft’s underperformance, even as the analyst community continues to support the stock. According to a poll by Barchart, Microsoft holds a consensus rating of “Strong Buy” from 48 analysts. Currently, the stock trades below the lowest target price of $490, while the average target price stands at $629.23, indicating a potential upside of nearly 30%.
Future Prospects and Market Positioning
The recent adjustments in target prices show confidence in Microsoft’s resilience. DA Davidson and Jefferies have maintained their bullish stances, setting target prices at $675 and $650, respectively. Although the stock trades at a forward price-to-earnings (P/E) multiple of 30.6x, which is considered balanced, the P/E-to-growth (PEG) ratio appears less favorable at 1.82x. This situation is largely due to the impact of rising AI capex on profits.
Despite concerns raised by prominent investor Michael Burry regarding the longevity of AI chip efficiency, companies like Microsoft are prepared for higher depreciation expenses in the coming years. Nevertheless, the fundamentals remain strong, with Microsoft presenting a defensive investment strategy supported by a well-diversified business model. Its Windows and Office segments are expected to benefit from a resurgence in PC sales, driven by an aging user base and the introduction of AI-integrated devices.
The end of support for Windows 10 is anticipated to further stimulate upgrades to Windows 11, enhancing revenue potential. Additionally, AI is creating a surge in subscription demand, which will bolster Microsoft’s top line. The company’s cloud division is expanding rapidly, narrowing the gap with market leader Amazon. During its recent earnings call, Microsoft reported a 50% increase in its commercial cloud remaining performance obligations (RPO), reaching $400 billion by the end of September.
Overall, while the past two years have posed challenges for Microsoft, the outlook for 2026 appears promising. Investors are encouraged to consider the stock as a viable option, particularly as it aims to deliver double-digit returns in the coming year.
