Microsoft Faces AI Fatigue as Investors Look Elsewhere for Growth

Microsoft Corp.’s stock performance has seen a slowdown in recent months, as investors show signs of AI fatigue and look for better value elsewhere in the tech sector. Over the past six months, Microsoft’s shares have declined by less than 1%, while the Nasdaq 100 Index has risen nearly 10%. As of Tuesday, the stock is trading 9% below its all-time high, while an ETF tracking software firms reached a record close on Monday.

The underperformance comes after mixed earnings results in Microsoft’s latest quarter and a cooling off of AI enthusiasm as a driver of stock gains. According to Neville Javeri, a senior fund manager at Allspring Global Investments, investors are looking for additional proof of sustained demand for Microsoft’s AI products and services before the rally can hold.

Analysts Grow Cautious on Microsoft’s AI Competitiveness

Some analysts are also becoming more cautious about Microsoft’s AI lead. Gil Luria, an analyst at D.A. Davidson, downgraded Microsoft to neutral from buy, citing the company’s diminished AI lead and increasing competition from cloud rivals like Amazon and Alphabet. With competitors catching up, Luria noted that justifying Microsoft’s premium valuation has become more difficult.

Microsoft currently trades at 31 times estimated earnings and 11 times projected revenue, which is well above its 10-year averages and higher than the Nasdaq 100’s forward earnings multiple of 26 times.

Comparison to Oracle’s Strong AI Growth

Meanwhile, Oracle Corp. has emerged as an attractive alternative for investors seeking software companies with robust AI growth. Oracle, which trades at a lower multiple of 26 times projected earnings, has seen upgrades from several firms due to its AI momentum. Analysts note that Oracle is still in the early stages of its growth curve, making it an appealing option compared to Microsoft, which has already seen substantial gains from its AI investments.

Microsoft’s July earnings revealed a slowdown in Azure cloud growth, which, despite being tied to AI, was lower than some had hoped. This has fueled concerns about the timeline for seeing significant returns on Microsoft’s AI investments.

Long-Term Optimism Remains

Despite the short-term challenges, Microsoft’s stock is still up 14% this year, following a strong 57% gain in 2023. Most analysts remain bullish on the company, with 94% rating Microsoft as a buy. The company’s long-term growth prospects remain promising, with revenue expected to rise 14.5% in the 2025 fiscal year and accelerate further to 19% by 2028. Net earnings per share are also projected to grow at a double-digit rate in the coming years.

What This Means for Microsoft’s Future

While Microsoft’s shares are currently facing pressure from AI fatigue and high valuations, the company’s long-term outlook remains strong. As AI adoption continues to evolve, Microsoft is well-positioned to benefit from its investments in Azure and AI products. Although competitors are catching up, the company’s growth trajectory over the next few years suggests that it will continue to be a key player in the AI and cloud space, especially as it builds on its foundational strengths.