How Microsoft went from generative AI leader to laggard and what to do with the stock
Investors are closely watching Microsoft's performance as it navigates through this challenging period. The company's stock price has faced significant volatility in recent weeks. Market analysts are monitoring key indicators to assess the stock's future direction. Microsoft's ability to rebound from this streak will be important for investor confidence in the tech sector.
Microsoft stock is trying to avoid its longest weekly losing streak since 2008. It's no wonder the Club position has been trying our patience. It's not just the broader market's recent decline that's contributing to a run of seven straight down weeks for Microsoft. To be fair, Meta Platforms is our only big tech stock higher year to date. But zooming out, though, Microsoft has lost nearly 9% over the past 12 months, showing just how much it has been lagging. Its megacap peers are all sharply higher during the same stretch.
Microsoft's Past Performance
Ironically, Microsoft's underperformance can be traced back to the same factor that was once its strength: artificial intelligence. Microsoft stock surged nearly 57% in 2023, its best year in well over a decade. The company enjoyed the halo of a first-mover advantage in generative AI through its investment and partnership with OpenAI, whose ChatGPT shortly after launching in 2022 went viral and sparked the current boom in artificial intelligence. Wall Street analysts at the time also continued to celebrate revenue acceleration of Microsoft's Azure, its crucial cloud computing division.
Shares of Microsoft continued to surge into 2024, but ran out of steam in the second half of last year after closing at a record high of $467.56 per share back in July. The stock struggled for the rest of 2024, and that weakness has spilled over into 2025 as questions started to surface about whether the software and cloud giant was losing its edge on AI.
Challenges Faced by Microsoft
"Microsoft has increased investment over the past few quarters at a very rapid rate while, at the same time, their revenue growth has decelerated," D.A. Davidson analyst Gil Luria told CNBC. "They're spending more to get less. That's what investors have been worried about." The other problem, as Luria sees it, is fellow tech giants are catching up. Amazon Web Services (AWS) has come up with a large language model that rivals OpenAI's GPT-4, which Microsoft uses in its data centers so that clients can run AI models in Azure. Amazon, also a Club name, is now offering several models in addition to its own, including one from startup Anthropic. Alphabet's Google and Meta have both made advancements with their AI models — Gemini and Llama, respectively.
Despite his Microsoft's past missteps, Luria and his D.A. Davidson colleagues last week became more bullish going forward against the backdrop of concerns about an economic recession. They upgraded their rating to a buy and raised their price target to $450 per share — a level that represents 16% upside to Wednesday's close.
Future Outlook for Microsoft
"Microsoft needs to get its house in order," Jim added. In his most recent Sunday column, Jim made the case that the handful of Big Tech stocks could rise from the ashes. He cited the group's past outperformance following the collapse of Silicon Valley Bank in 2023. "I don't want to make a case for buying these six bedraggled stocks just yet," he wrote. "I am just putting it in your head that if we didn't think they would collapse into recession along with the rest of the market two years ago, and we still believed in AI ... then the Mag Seven, ex-Tesla, seem likely to be the only logical places to hide and then to buy."