The stock market has gotten off to a very different start to the year than most investors might have imagined. The broader benchmark S&P 500 (SNPINDEX: ^GSPC) is down close to 5%, while the Nasdaq Composite (NASDAQINDEX: ^IXIC) has entered correction territory (as of March 11). Investors seem to have overplayed their hands in believing that President Donald Trump would not follow through on campaign promises to implement sweeping tariffs against key U.S. trading partners, including China, Mexico, and Canada. That, coupled with weaker economic data, has stoked concerns about a recession or maybe even stagflation.
While the situation is fluid, many stocks have been hit hard, presenting a potential buying opportunity. You won’t believe the stock that recently hit a 52-year low.
More questions than answers when it comes to AI
The artificial intelligence trade has fueled the recent bull market run. Investors poured into stocks tied to AI, which many believe will revolutionize life as we know it. The “Magnificent Seven” stocks, a group of tech stocks heavily believed to be huge beneficiaries of AI, emerged from this trade.
Microsoft (NASDAQ: MSFT) is part of the Magnificent Seven and is one of the most important technology companies in the world, with many of its products powering the business world. However, the company has failed to excite investors like its peers. The stock has struggled over the past year and is now at a 52-week low and well below its 52-week average.
MSFT data by YCharts.
Investors have been concerned about Microsoft’s future with AI, and they’re trying to assess what the return on the company’s heavy investments will be and when they will materialize. This is an issue many companies investing in AI are dealing with. Microsoft has vowed to spend $80 billion on AI this year, but is doing so while the company has struggled in other areas.
Gross profit margins at the company declined over the past year, but are still well above 60%. In its most recent quarterly earnings report, Microsoft beat Wall Street analyst estimates on earnings per share and revenue, but saw weaker growth than expected in its Azure cloud business. The company also issued weaker guidance than expected for the current quarter.
The cloud business is supposed to reap benefits from AI, so investors were disappointed by the results. On Microsoft’s most recent earnings call, management said that AI revenue surpassed $13 billion and exceeded their expectations. Management also attributed weakness in its cloud business to non-AI services, which came in below management’s expectations.
Microsoft will find a way
Despite questions about AI capital expenditures, analysts are still bullish on the company. Of the 31 analysts that have issued a research report on Microsoft over the past three months, 28 rate the company a buy and three say hold, according to TipRanks. The average price target implies 34% upside from current levels.
In the near term, the proof will be in the pudding regarding whether Microsoft can produce tangible results from all its AI spending. However, in the long term, I expect the company to benefit, given its track record of innovation and all the resources at its disposal. Microsoft has tremendous revenue diversity within technology, from its cloud business to social media to gaming to its suite of office products. I see this as a core advantage of the company that will be hard for peers to replicate.
Additionally, Microsoft is one of the few companies that has a better credit rating than the U.S. government, so investors shouldn’t have to worry about its durability. For its fiscal year 2025, analysts expect Microsoft to generate $48 billion of free cash flow. The company’s forward price-to-earnings ratio is 28.7, which is below its five-year average of about 30.5. Interested investors can take advantage and buy the dip.
