Microsoft’s (MSFT) recent performance has drawn the attention of investors, particularly as it continues its aggressive push into artificial intelligence. While the stock has seen a dip in 2024, analysts remain largely optimistic about the company’s future, especially given its strategic spending on AI infrastructure.
Microsoft, a key player in the technology sector, generates substantial revenue through its diverse business units. The company has established a prominent position in artificial intelligence. However, recent market trends have created some investor concerns. Despite the company’s strong fundamentals and potential growth prospects, MSFT stock is currently trading at a discounted price.
Microsoft’s Strategic AI Investments
Microsoft has emerged as a major investor in AI infrastructure. In its January earnings report, the company stated it planned to spend approximately $80 billion on AI-enabled data centers throughout its current fiscal year, ending in June 2025. CEO Satya Nadella highlighted the significant demand from customers, noting that Microsoft’s AI business has already achieved an annual revenue run rate of $13 billion, reflecting a substantial year-over-year increase of 175%.
However, there are indications that Microsoft may be adjusting its spending plans. The company has started canceling and slowing down some data center agreements. This move reflects uncertainty regarding the impact of China’s DeepSeek LLM on future AI hardware needs. Nonetheless, Microsoft anticipates continued AI spending by businesses.
Notably, Microsoft is less susceptible to consumer spending fluctuations than other major tech companies. Businesses are likely to continue investing in cloud computing, cybersecurity, and AI, regardless of consumer spending trends.
Regulatory Scrutiny and AI Strategy
Microsoft’s pivot to AI has also raised questions from regulators. The Federal Trade Commission (FTC) has launched an antitrust probe into the company’s AI operations. The investigation centers on several key areas:
- How Microsoft obtains and costs training data for its AI models.
- Whether Microsoft properly disclosed its investment in OpenAI to regulators.
- The power requirements of its data centers and the company’s ability to secure the necessary computing power.
- Whether its software licensing practices create an unfair competitive advantage.
While the investigation might prove inconsequential, it could still lead to costly litigation and take years to resolve.
Valuation and Analyst Outlook
Following the recent sell-off, MSFT stock has become more attractive. The stock is trading at a price-to-earnings (P/E) ratio of around 31x and a forward P/E ratio of around 29x. This is a decrease from the July 2024 valuation and reflects a return to more historical levels. Analysts remain largely optimistic about Microsoft’s stock.
MSFT currently trades at around $388 per share, which is 31% below the analysts’ consensus price target of $510.43. In March, several analyst reports reaffirmed their positive outlooks on the stock.
- Stifel Nicolaus reiterated a Buy rating while reducing its price target to $475.
- D.A. Davidson upgraded the stock from Neutral to Buy and increased the price target to $450.
Analyst Gil Luria cited Microsoft’s more “rationalized” approach to AI spending as a key factor. The general view is that the company’s focus on protecting profit margins will be crucial, especially given the potential moderation in consumer spending.
