Microsoft’s (NASDAQ:MSFT | MSFT Price Prediction) stock had a really strong run through most of 2025, fueled by the company’s all-in bet on artificial intelligence (AI). They wove AI features into Azure cloud services, Microsoft 365 tools, and pretty much everything else, which got investors fired up and drove the share price to new highs.
That momentum came to a screeching halt in late October, though, when the stock topped out around $541 per share. Since then, it’s fallen sharply and steadily — down about 27% from that peak to roughly $401 per share now. Year-to-date, shares are off around 17%. The pullback has left a lot of investors on edge, especially since one big factor seems to be driving most of the weakness, prompting questions about whether it’s time to sell.
Solid Revenue and Profit Momentum
The latest earnings painted a pretty solid picture on the business fundamentals. In the fiscal second quarter, Microsoft pulled in over $81 billion in revenue, up 17% from the year before. The core segments held strong despite some broader market pressures. The Productivity and Business Processes segment, including Microsoft 365 commercial subscriptions and Dynamics, grew 16% to $34 billion. The Intelligent Cloud segment, powered by Azure and other services, surged 29% to nearly $33 billion. The more consumer-oriented Personal Computing side dipped a bit — down 3% to about $14 billion — mostly because gaming was weaker, though search advertising and Windows licensing helped offset some of that.
Cloud revenue overall hit $51.5 billion, up 26%, and crossed the $50 billion quarterly mark for the first time. That’s a clear sign of how much the business is shifting toward cloud and AI-driven services.
Profitability stayed impressive, too. Gross margins held steady in the high 60% range, even with heavy infrastructure spending. Operating income rose 21% to $38 billion, and net income jumped 60% to $38.5 billion. Adjusted earnings came in at $4.14 per share, up 24%. These numbers show the profitability machine is still humming along nicely, even as the company pours money into future growth.
Betting Big on AI
Speaking of spending, Microsoft has been going big on capital projects by expanding data centers and building out AI capacity to meet skyrocketing demand, describing it as record-level investment in some areas. All that capex has put some short-term pressure on free cash flow compared to previous years, as resources shift toward scaling up rather than maximizing immediate cash generation. Management has pointed out that demand is actually outpacing supply in spots, which explains the intense spending.
That heavier investment has investors a little nervous about near-term cash flow. But on the valuation side, the forward price-to-earnings ratio has come down to the mid-20s, which is one of the more attractive levels in recent years (outside of brief dips). It looks like the market has already priced in a good chunk of the uncertainty, potentially setting up a nice opportunity for long-term believers.
The No. 1 Cause for Concern
So what is the real source of the recent weakness? A big portion of Microsoft’s future contracted revenue is now tied to OpenAI’s performance, which adds some extra risk. The commercial remaining performance obligation — basically booked future revenue — hit $625 billion, more than doubling from last year. However, roughly 45% of that is linked directly to OpenAI commitments, including some massive multi-year Azure deals.
The non-OpenAI part still grew a healthy 28%, which shows solid demand elsewhere, but that concentration spooked investors after the earnings release. People started worrying that any stumble at OpenAI could ripple through a meaningful chunk of future revenue, which has amplified the stock’s volatility.
Key Takeaways
Despite the risk, Microsoft looks well-equipped to weather this and come out stronger. That enormous $625 billion backlog points to sustained enterprise appetite for cloud and AI solutions, and growth isn’t solely riding on OpenAI. Analysts see earnings per share compounding at around 19% to 20% annually through the end of the decade, thanks to Azure’s leadership and Copilot gaining traction across products.
At today’s prices, the stock trades at a discount to its historical multiples — even with faster expected growth ahead. Other big tech peers like Amazon (NASDAQ:AMZN) or Meta Platforms (NASDAQ:META) often carry higher valuations, so if Microsoft moved closer to those levels, there could be serious upside. The average analyst price target sits around $597 per share, suggesting about 49% upside potential from current levels near $401. With rock-solid fundamentals, ongoing AI momentum, and a proven track record, this dip feels more like a temporary breather than a sign of bigger problems.
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