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With a YTD gain of just over 10%, Microsoft (MSFT) stock is underperforming the S&P 500 Index ($SPX). The stock’s returns are the second-lowest among the closely followed “Magnificent 7” group, with only Tesla (TSLA) faring worse. Even Alphabet (GOOG), with all its regulatory woes, has performed better - though the Google parent’s stock has also underperformed markets this year.
In this article, we’ll see why Microsoft's stock has underperformed in 2024, and whether the company can make up for lost time in the final quarter of 2024.
Microsoft Lost the Crown of the Biggest Company
While the title of the world’s biggest company has largely stayed with the same company for an elongated period before a challenger decisively beats them – it has pretty much been a game of musical chairs this year.
While Apple (AAPL) was the biggest company at the beginning of the year, Microsoft edged past the iPhone maker by mid-January. By March, Microsoft had extended its lead over Apple by a massive $400 billion.
However, in June, Nvidia (NVDA) outflanked both Microsoft and Apple to become the world’s largest company – a possibility no one had envisioned just a couple of years back, and especially not so soon.
Shortly after, Apple took back its crown as the world's biggest company after it shed the perception that it was slacking in its artificial intelligence (AI) endeavors. AAPL continues to remain the world's biggest company, despite apprehensions over sales of its AI-powered iPhone 16.
Why Has Microsoft Stock Looked Weak?
Microsoft stock is down over 11% from its 2024 highs, and is in correction territory. There are two main reasons why Microsoft stock has struggled since peaking in July.
First, the company’s valuations got a bit ahead of themselves, and its next 12-month (NTM) price-to-earnings (PE) multiple rose as high as 37x - which was quite a bit higher than what the Redmond-based company has historically traded at.
Second, at least a section of the market is apprehensive about Microsoft’s ability to monetize its AI investments – including its multi-billion dollar bet on ChatGPT parent OpenAI. Oppenheimer recently downgraded Microsoft to a “neutral” equivalent, as the brokerage believes that the company’s earnings and revenue estimates are “too high.”
Consensus estimates call for Microsoft’s revenues to rise 13.9% in the current fiscal year (ending June 30, 2025) and 14.4% in the next fiscal year. The company’s earnings per share (EPS) are expected to rise 10.3% and 15.2%, respectively, in the fiscal years 2025 and 2026.
Oppenheimer is not alone in downgrading MSFT. D.A. Davidson also downgraded the stock by one notch to “neutral,” while maintaining its $475 target price. Goldman Sachs cut MSFT's target price from $515 to $500, but maintained its “buy” rating.
MSFT Stock Forecast
Despite recent bearishness among some sell-side analysts, MSFT has received a consensus rating of “strong buy” from the 38 analysts actively covering the stock. It even trades below the Street-low target price of $448, while the mean target price of $503.55 is nearly 21% higher than Friday’s closing prices. Microsoft’s Street-high target price of $600 (via Truist) implies an impressive upside of 44%.
Question Mark Over Tech Companies’ Ability to Monetize AI Investments
To be sure, concerns over Microsoft’s ability to monetize its massive AI investments are not unfounded. Such concerns are not limited to only Microsoft; investors in other Big Tech companies are also questioning whether they will be able to make sufficient returns on their AI bets.
Blue Whale Growth Fund’s chief investment officer, Stephen Yiu – who has been selling Microsoft shares – believes that the margins Microsoft would make on AI-powered services will be lower than what it has made on traditional subscriptions. According to Yiu, Microsoft will need to continue investing in updating its AI models, and while the company’s absolute profits should still rise, its return on investment will dip.
Can Microsoft Stock Catch Up to Its Big Tech Peers in Q4?
While Microsoft’s valuation multiples have come off their highs, the stock does not look mouthwatering at the current NTM PE multiple of 31.6x. While the multiple is towards the midpoint of where MSFT has traded in the last five years, they don’t exactly look enticing – even as they're not exorbitant, either.
Microsoft has the first-mover advantage in AI, and can bundle many of its existing products with AI subscriptions. However, these subscriptions have yet to take off in a major way, and it remains to be seen how they'll impact its earnings and profits.
I find MSFT’s risk-reward quite balanced at these price levels. While I won't be adding any new shares at this price point, any further dip in the stock should present a good buying opportunity.
On the date of publication, Mohit Oberoi had a position in: MSFT , GOOG , AAPL , TSLA , NVDA . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
