Microsoft blames delay on ‘AI fatigue’, high multiplexing backlash

Ryan Vlastelica
| Bloomberg

Microsoft Corp. Its shares have lost their luster over the past few months as some investors soured on AI trading and sought better value elsewhere in the sector.

The software company’s shares are up just 1.3% over the past six months, compared to a nearly 10% gain for the Nasdaq 100 Index. The stock remains 8 percent below its all-time high, while an exchange-traded fund that tracks software companies closed at a record high on Monday. The underperformance comes as Microsoft reported mixed results in its latest quarter and AI is losing ground as a driver of stock gains overall.

“There is some AI fatigue with companies like Microsoft, given the incredible performance they have had,” said Neville Javeri, senior fund manager at Allspring Global Investments. Investors “need to see additional proof points about demand for AI products and services for the rally.”

Analysts at DA Davidson were also more cautious towards Microsoft.

Analyst Gil Luria said cloud rivals Amazon.com Inc. “On the AI front, competition has largely caught up with Microsoft, which diminishes the justification for the current premium valuation,” he wrote in a note last week, referring to Apple Inc. and Alphabet Inc. Luria downgraded the stock from buy to neutral, saying AI would “make it difficult for MSFT to continue to outperform.”

Microsoft is trading at 31 times estimated earnings and almost 11 times estimated revenue. While both coefficients are below recent peaks, they are well above their 10-year averages. The Nasdaq 100 trades at less than 26 times forward earnings and less than 5 times sales.

The stock has also emerged as a popular alternative for software investors after its latest results showed strong AI tailwinds of its own. He also made some negative comparisons with. Oracle’s offering of a lower multiple, trading at 26 times forecast earnings, caused many firms to lift their shares last month.

“Oracle is a new kid on the block because it’s more in the early innings of the growth curve,” said Christopher Ouimet, portfolio manager at Logan Capital Management. “As more investors roll up their sleeves to look at this, Microsoft is sharpening its pencils as it focuses on Azure’s growth and when it will generate greater returns on its capital expenditures.”

Microsoft’s July earnings revealed a slowdown in its Azure cloud computing service. Although it showed growth attributable to artificial intelligence, this figure was lower than some had hoped; This underscores concerns about when Microsoft will see a more significant return on investments in AI.

Even after a weak few months, Microsoft shares remain up 14% this year, and the recent underperformance follows a 57% rise in 2023. The vast majority on Wall Street remain bullish, with more than 94% of analysts rating Microsoft stock as a buy. According to data compiled by Bloomberg.

The company’s long-term prospects are still seen as positive. Revenue is expected to grow 14.5% in fiscal 2025 and accelerate over the next few years, reaching 19% by 2028. Net earnings per share are also likely to post double-digit growth for the next few years.

In this environment, investors like Allspring’s Javeri and Logan Capital’s Ouimet are bullish on the stock over the long term, despite short-term challenges.

“It’s never surprising to see a stock falter, especially after it’s performed well and the market has expanded, but it’s hard to find a company of this size and quality that will grow at this level over the next few years,” Ouimet said. in question. “Microsoft is so well positioned that the further it pulls back, the more attractive it looks.”

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With the help of Subrat Patnaik.