Microsoft (MSFT) Stock: About to Plunge? AI Investment Struggles to Deliver Expected Returns

TLDR

• Microsoft shares are at a critical technical support level with potential 15-20% downside risk
• Stock has formed a topping pattern and closed at $388.49 on Monday, near Wolfe’s downside target of $385
• Microsoft has experienced three consecutive quarters of negative post-earnings reactions
• AI monetization has been slower than expected amid concerns over OpenAI partnership and Chinese competitor DeepSeek
• Microsoft’s aggressive AI spending, with $80 billion in expected capital expenditures this fiscal year, has pressured shares

Microsoft has been struggling to maintain its position as a leading artificial intelligence stock, with shares facing both technical pressure and fundamental concerns about the timeline for AI investment returns.

The tech giant’s stock closed at $388.49 on Monday, hovering near a critical support level of $385 identified by Wolfe Research analysts.

In a Tuesday note, Wolfe Research warned that Microsoft “really needs to make a stand here” as the stock has been forming a topping pattern for months.

If Microsoft fails to hold current support levels, the firm cautioned that “this yearlong top has the potential to count to $315-335,” representing a 15-20% decline from current levels.

The selloff comes amid broader weakness in AI-related stocks. Microsoft’s recent earnings report in late January marked the third consecutive quarter of negative post-earnings reaction.

While the company’s AI services showed growth, monetization has been slower than expected. This slower-than-anticipated payoff has led investors to reassess when the tens of billions of dollars Microsoft has invested in AI will translate into improved earnings and growth.

Adding to investor concerns is the emergence of Chinese AI startup DeepSeek, which has claimed to find a more efficient way to create AI models requiring fewer servers and computing chips.

This development has raised questions about Microsoft’s partnership with OpenAI, the maker of ChatGPT, which competes directly with DeepSeek.

Microsoft continues to spend heavily on AI infrastructure. The company expects capital expenditures to reach $80 billion this fiscal year for AI data centers, though TD Cowen recently reported Microsoft has canceled some leases for US data center capacity.

Magnificent Seven Stocks

Among the “Magnificent Seven” tech stocks, Microsoft has gone the longest without hitting a fresh record. The stock is down about 17% from its peak in July and recently closed at its lowest level since January 2024.

The current price action stands in stark contrast to the gains posted by both the Nasdaq 100 Index and software sector ETFs over the same period.

Microsoft’s valuation has decreased as a result of these struggles. Shares currently trade below 27 times forward earnings, the lowest in nearly two years and well below the July peak of 35.

Despite these near-term challenges, Wall Street analysts remain largely optimistic about Microsoft’s long-term potential. More than 90% of analysts tracked by Bloomberg recommend buying the stock.

Analysts expect Microsoft’s revenue to grow about 13% in fiscal year 2025, with acceleration projected for the following two years. Net earnings are forecasted to rise 11% this fiscal year before also accelerating.

Arup Datta, portfolio manager at Mackenzie Investments, maintains a positive outlook: “Microsoft and other Mag 7 names had gotten ahead of themselves, but there’s a lot more valuation support now that it has come in, and shares even look a little cheap compared with peers.”

Some analysts view the current pullback as a buying opportunity, noting Microsoft’s consistent cash flow, predictable earnings, and subscription-based revenue model.