Microsoft (NASDAQ:MSFT | MSFT Price Prediction) has been sliding since October despite the company posting strong results. It is down over 16% since the start of November, and the slide looks to be getting worse, even though there isn’t a scare of any kind.
This is rather puzzling, as Microsoft is a key part of the AI buildout and one of the fastest-growing hyperscalers. Its Azure cloud computing platform is set to overtake AWS as the largest on the block. Azure is especially popular with AI clients like OpenAI. Last year, the company made headlines with its $80 billion spending commitment, something that is surely set to rise as none of the AI companies have hinted that they’re slowing things down.
Microsoft is now the fourth largest company, behind Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG, NASDAQ:GOOGL), and Nvidia (NASDAQ:NVDA). At a time when everything that can go right is going right… What gives?
Is Microsoft the AI company that isn’t?
It wasn’t a long time ago that Microsoft announced it was working on its own in-house AI model to reduce dependency on OpenAI. These models were released and made some headlines last year, but then quickly faded into the background. Most other tech companies have not been resting on their laurels and have continued advancing their own AI models.
Alphabet has been the most prolific. Its AI models are arguably better than what OpenAI or Anthropic has to offer. Speaking of Anthropic, this is a company that is barreling towards profitability and is linked heavily to Amazon (NASDAQ:AMZN) as the company invested in it as a response to Microsoft’s investments in OpenAI.
Even Meta Platforms (NASDAQ:META) has its own AI model, and it’s widely used due to its integration with various messaging apps under the “Family of Apps” umbrella. Apple is partnering up with Google to integrate AI, which is a smart move as the company hasn’t been too involved with AI in the first place.
Microsoft is still at the back of the line when it comes to having the best chatbot.
Where Microsoft shines
Microsoft’s investments in OpenAI are paying off in spades, albeit indirectly. OpenAI expects $115 billion in losses through 2029. However, a lot of that money will be going into data centers, like Microsoft’s Azure.
Azure grew 40% year-over-year, and management guided for similar growth in the coming quarters. Total revenue grew 18% and was ahead of expectations. Microsoft’s “AI” component is more skewed towards hardware.
AI integration into many of its white-collar tools has increased its value proposition. I’d argue that integrating AI with Office 365 isn’t a game-changer. Corporate customers won’t be replacing Windows or Excel anytime soon. It’s still a nice excuse to charge more. Its latest 365 price increase announcement was in December, on top of earlier increases due to “cost increases to develop new innovations”. This is how Microsoft posted a 17% revenue increase in the Productivity and Business Processes segment.
Where I see MSFT stock in 2026
How 2026 turns out for Microsoft depends mostly on the broader AI rally. This is the case for every hyperscaler, but especially for Microsoft, as most of its momentum is derived from Azure, plus aggressive price increases on its newly AI-integrated software stack. If Azure’s growth slows down and the data center buildout shows cracks, the Street will use this as an excuse to discount the stock lower. Regardless, it’s unlikely to go too far.
You’re paying 28 times FY 2026 earnings for the stock and less than 25 times earnings for FY 2027. It’s right around the historical average and not expensive. The recent correction and fears around AI have kept the premium rangebound.
Thus, I’d rule out MSFT stock ending the year below $400 unless the music stops for AI as a whole.
It is more likely that MSFT stock makes a move towards $600.
If MSFT stock ends the year at exactly $600, that’d be ~32 times FY 2027 earnings, or a 31.8% upside from here. It’s slightly on the upper range of how much investors have historically paid for the stock in the past five years. I’d buy the dip.
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