On Monday, two new reports from prominent analysts boosted the buying case for Microsoft (MSFT) stock. The tech giant’s share price rose 3.6% on the day, significantly outperforming the S&P 500’s 1% gain. Among them, Goldman Sachs’ technology sector overview released last Friday exacerbated the heavy losses many traditional software companies have suffered this year, largely due to market concerns over the disruptive impact of artificial intelligence — some fear that AI could become “smart” enough to write complex applications with little or no human intervention.
Peter Oppenheimer, Goldman Sachs‘ Chief Global Equity Strategist, believes that markets tend to overreact, which has led to many fundamentally strong companies being undervalued. He has stated that the sell-off “has created opportunities in the tech sector, where growth rates remain robust but valuations are low.”
Mark Moerdler of Bernstein Societe Generale released a new report on Microsoft stock on Monday morning, reiterating an “Outperform” (i.e., Buy) rating and a $641 price target on the tech giant. The analyst pointed out that industry giants like Microsoft are not being left behind by the times; rather, they are actively embracing AI technology — the company has invested billions of dollars in OpenAI, the developer of ChatGPT. Furthermore, no AI model, regardless of how advanced its coding capabilities, can replace Microsoft’s foundational software and cloud services.
Microsoft’s stock has fallen 21% this year and is down 1% over the past 12 months. For a company as strong and diversified as this, such performance is surprising, especially given its significant investments in emerging fields like AI. Currently, Microsoft’s price-to-earnings ratio is just 23 times (based on trailing 12-month earnings), with a forward P/E of 19 times. In comparison, the average P/E of S&P 500 constituents is over 24 times, with a forward P/E of 21 times.
A major near-term concern for investors has been the slowing growth rate of Microsoft’s cloud computing business, Azure. In January, Microsoft’s stock fell sharply after Azure’s growth rate decelerated to 39%, down from 40% in the previous quarter. Last October, increased capital expenditures also unsettled investors, who questioned whether its AI strategy was delivering value for money. However, most of the negative sentiment surrounding the stock may now have been priced in by the market.
Investors may be hoping for a positive catalyst when Microsoft releases its latest earnings report on April 29. Analysts believe that with Microsoft’s profit margin at around 40%, a slowdown in any single business segment is insufficient to justify its stock trading below the S&P 500 average. This remains a company with excellent long-term growth prospects. Regardless of the earnings outcome, buying before the report could be a prudent move for patient investors.
