Microsoft’s AI Investments Face Scrutiny
Microsoft has ploughed tens of billions of dollars into artificial intelligence (AI). With its stock struggling, the key question is how quickly those investments can prove to be successful.
Slower Adoption
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.
Expectations vs. Reality
“The market is coming to a realisation 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”.
Investor Sentiment
Even if the pace of AI adoption is slower than hoped for, Microsoft remains a consensus favourite on Wall Street. More than 90 per cent of the analysts tracked by Bloomberg recommend buying the stock, and the average analyst price target points to upside of almost 20 per cent over the coming 12 months, the highest return potential among the Magnificent Seven, except for Nvidia.
Positive Outlook
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 monetisation 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.”
Conclusion
Microsoft’s AI investments face scrutiny as the company’s stock struggles. While adoption of its AI services has been slower than hoped, the company remains a consensus favourite on Wall Street. The question is whether the company can prove the concept of its AI investments and provide a return on its spending.
Frequently Asked Questions
Q: What is Microsoft’s strategy for AI adoption?
A: Microsoft is pushing AI adoption through its various services, including its suite of Office apps, which come with access to AI tools.
Q: What is the current sentiment on Microsoft’s stock?
A: More than 90 per cent of analysts tracked by Bloomberg recommend buying the stock, and the average analyst price target points to upside of almost 20 per cent over the coming 12 months.
Q: What is the outlook for Microsoft’s earnings?
A: Revenue at Microsoft is expected to grow about 14 per cent this fiscal year, and earnings are also seen expanding at a double-digit pace for the next several years.
