Microsoft Corp. (MSFT) has experienced a challenging period, with year-to-date gains of approximately 15%. This performance falls short of both the broader S&P 500 Index and the tech-heavy Nasdaq Composite Index. Under the leadership of Satya Nadella, the company has struggled to keep pace with its peers, recording a modest 12% increase in 2024.
In the broader market context, the so-called “Magnificent 7”—which includes tech giants like Alphabet and Nvidia—also faced headwinds in 2025. None of these companies made the top 20 gainers in the S&P 500 Index last year, highlighting a trend of underperformance. While Alphabet and Nvidia managed to outperform the average of their S&P 500 counterparts, Microsoft’s position has been under scrutiny due to rising concerns over its capital expenditures in artificial intelligence (AI).
Analyst Dan Ives from Wedbush Securities has expressed optimism regarding Microsoft’s future, predicting a price target of $625 for the stock in 2026. He characterized it as a “compelling buy,” even as the company grapples with its performance challenges. Microsoft’s current dividend yield of 0.75% stands out among its tech peers and positions it on the brink of becoming a Dividend Aristocrat.
The $35 billion capital expenditure in the first quarter of fiscal year 2026 marked a record for Microsoft. Initially, the company had indicated that capex growth would decline in the fiscal year, but this recent spike suggests a different trajectory. Microsoft’s increased spending on AI is mirrored by other tech giants such as Amazon and Meta Platforms, which have also ramped up their investments amid an intense competition in the AI sector.
The relationship between Microsoft and OpenAI has also influenced market dynamics. As OpenAI gains traction, it has inadvertently placed pressure on Microsoft, which is a significant investor in the startup. This competitive landscape has contributed to Microsoft’s underwhelming performance.
Despite these challenges, the analyst community remains optimistic. A consensus rating of “Strong Buy” has emerged from a survey of 48 analysts conducted by Barchart. Currently, Microsoft shares are trading below the lowest target price of $490, while the average target price stands at $629.23, suggesting a potential upside of nearly 30%.
Investment firms such as DA Davidson and Jefferies have maintained their bullish outlooks on Microsoft, with target prices set at $675 and $650, respectively.
As Microsoft approaches 2026, it trades at a forward price-to-earnings (P/E) multiple of 30.6x. Although the price-to-earnings growth (PEG) ratio appears less favorable at 1.82x, this is largely attributed to the increased capital expenditure affecting profit margins.
Looking ahead, the company’s diversified business model remains robust. The ongoing demand for Windows and Office products is expected to benefit from an uptick in PC sales, driven by an aging base of installed devices and the rising popularity of AI-enhanced PCs. The conclusion of support for Windows 10 will likely encourage users to upgrade to Windows 11.
Moreover, the AI boom is expected to boost subscription services, further enhancing Microsoft’s revenue streams. The cloud division is experiencing rapid growth, with Microsoft narrowing the gap with market leader Amazon. During a recent earnings call, Microsoft reported a 50% increase in commercial cloud remaining performance obligations (RPO), reaching $400 billion with an average duration of just two years.
While I have not consistently taken a bullish stance on Microsoft, I have seized opportunities to increase my holdings during dips. At its current levels, Microsoft stock presents a compelling investment opportunity, and I anticipate it will deliver double-digit returns in the upcoming year.
