Microsoft’s AI Strategy Eases Analyst Concerns—Is It a Buy?

Key Points

• Microsoft stock was one of the worst-performing technology stocks in the last year, despite generating significant revenue from its AI platforms.
• The company has recently announced a more practical approach to AI spending, but it has the attention of the FTC.
• MSFT stock is trading at an attractive historical valuation, and analysts continue to offer bullish sentiments.

Microsoft Corporation NASDAQ: MSFT is a bellwether for the technology sector. The company generates billions in annual recurring revenue through its multiple business units and has carved out a leadership position in artificial intelligence.

But in 2025, MSFT stock is down 7.8%. Over the past six months, it's fallen more than 10%. Looking at the stock chart, 2024 seems to have vanished—but it didn’t, leaving shareholders with paper losses.

That’s making some investors nervous about what’s ahead for tech and Microsoft. However, analysts remain bullish. In March, the company received two positive ratings, and with earnings set for April 24, it might be time for investors to reconsider.

Microsoft’s Smart Spending on AI

Microsoft has been one of the most prolific spenders on AI infrastructure. In its January earnings report, the company said it was planning to spend approximately $80 billion on AI-enabled data centers for its current fiscal year, which ends in June 2025.

Chief executive officer (CEO) Satya Nadella noted that there was “exponentially more demand” from customers. Nadella also noted that Microsoft’s AI business has already surpassed an annual revenue run rate of $13 billion, which is an impressive 175% year-over-year gain.

However, it doesn’t appear that Microsoft is committed to an indefinite level of spending. In February, the company began canceling and/or slowing the pace of some data center agreements. This comes as investors are pondering the impact of China’s DeepSeek LLM on future AI hardware demand.

That said, Microsoft is still expecting companies to spend on AI. And that’s also an important consideration for investors. Of all the Magnificent 7 companies, Microsoft is the least dependent on personal consumer spending. Consumers may cut back on purchases of Apple Inc. NASDAQ: AAPL iPhones or their shipments from Amazon.com Inc. NASDAQ: AMZN. But when it comes to cloud computing, cybersecurity, and now AI, businesses have little choice but to spend what it takes.

Remove Ads

Is Microsoft’s AI Pivot Driven by FTC Pressure?

However, some analysts are concerned that Microsoft’s pivot on AI is due to pressure being brought on by the Federal Trade Commission (FTC). The Trump administration recently opted to move ahead with a wide-ranging antitrust probe into the company’s AI operations over the last 10 years. The FTC is looking at issues like:

• How does Microsoft obtain training data for its AI models, and how much does that training cost?
• Did Microsoft cancel some of its AI development after agreeing to invest in Open AI, which it did not properly disclose to regulators?
• How much power do its data centers need, and why is the company having trouble obtaining the computer power it needs?
• Does how the company licenses its software bundles give it an unfair competitive advantage?

Most of these issues will probably turn out to be nothing. But that doesn’t mean it won’t cost the company millions of dollars to litigate, and the cases will take years to resolve.

Microsoft Stock’s Valuation Becomes More Attractive After Sell-Off

Technology stocks, especially the Magnificent Seven, have surged over the past two years, commanding significant premiums. Now, investors seeking a better entry point may have found one.

After the recent sell-off, MSFT stock is trading at a price-to-earnings (P/E) ratio of around 31x and a forward P/E ratio of around 29x. Two notable things are that the current P/E ratio is down about 20% from its July 2024 level and that the stock is trading at what has been historically a more “normal” level.

Analysts Remain Bullish on Microsoft Stock Despite Recent Dip

MSFT stock currently trades at around $388 per share, a 31% discount to the analysts’ consensus price target of $510.43. In March, Microsoft received two bullish analyst reports.

On March 7, Stifel Nicolaus reiterated its Buy rating on Microsoft while lowering its price target from $515 to $475.

Then, on March 17, D.A. Davidson upgraded the stock from Neutral to Buy and raised the price target from $425 to $450.

In doing so, analyst Gil Luria cited what he termed the company’s more “rationalized” approach to AI spending.

The belief is that the company will protect its profit margins at a time when consumer spending is showing signs of waning.