TLDR
- Microsoft shares hover at critical technical support level of $385, with Wolfe Research warning of potential 15-20% downside to $315-335
- Stock has been struggling for months, down about 17% from July peak and trading at lowest level since January 2024
- Microsoft has faced three consecutive quarters of negative post-earnings reactions, with AI monetization proceeding slower than investors expected
- Company continues aggressive AI spending, with $80 billion in expected capital expenditures this fiscal year
- Despite current weakness, analysts remain optimistic about long-term AI potential, with 90% recommending buying at current valuation
Microsoft’s stock has been navigating challenging waters lately, with technical analysts identifying critical support levels that could determine its near-term trajectory.
Wolfe Research warned in a Tuesday note that Microsoft shares have reached a decisive technical juncture. “Microsoft really needs to make a stand here,” the firm emphasized in its analysis.
The software giant closed at $388.49 on Monday, precariously close to Wolfe’s initial downside target of $385. This represents a significant pullback from its July peak.
If the stock fails to hold current levels, Wolfe cautioned about further downside. Their analysis suggests the “yearlong top has the potential to count to $315-335,” representing a 15-20% decline from current prices.
This technical weakness comes amid broader struggles for AI-related stocks. Microsoft has been particularly affected, with its shares now down about 17% from their July high.
The company closed Monday at its lowest level since January 2024. This performance stands in stark contrast to the gains posted by both the Nasdaq 100 Index and software sector ETFs over the same period.
Microsoft’s recent challenges stem from three consecutive quarters of underwhelming earnings reports. While its AI services have shown growth, the pace of monetization has disappointed investors expecting faster returns.
January’s earnings report highlighted underperforming growth in the Azure cloud-computing division. Part of this shortfall was attributed to insufficient data center capacity to meet demand.
Mark Luschini, chief investment strategist at Janney Montgomery Scott, noted the shift in market sentiment. “There were all these arguments that AI would improve productivity and be monetized with copious amounts of profitability, but that’s become a real show-me situation.”
Massive expenditures have raised concerns
Microsoft’s massive capital expenditures have also raised concerns. The company expects to spend $80 billion this fiscal year on AI data centers, though TD Cowen recently reported the company has canceled some leases for US data center capacity.
Adding to Microsoft’s challenges is growing competition in the AI space. Chinese AI startup DeepSeek emerged in January claiming to have developed a more efficient approach to creating AI models.
This development has implications for Microsoft’s partnership with OpenAI, which competes directly with DeepSeek. Michael Kirkbride, portfolio manager at Evercore Wealth Management, observed that “there’s a real question mark about OpenAI’s ability to pivot amid DeepSeek.”
Despite these headwinds, Microsoft’s valuation has become more attractive. Shares now trade below 27 times forward earnings, the lowest in nearly two years and well below the July peak of 35.
This multiple is only slightly above Microsoft’s 10-year average of about 26. The current price also sits 30% below the average analyst price target, the largest such discount in more than two years.
Wall Street remains broadly positive
Wall Street remains broadly positive on Microsoft’s long-term prospects. Analysts expect revenue growth of about 13% in fiscal year 2025, with acceleration projected for the two subsequent years.
This outlook for durable growth explains why more than 90% of analysts tracked by Bloomberg maintain buy recommendations. Earnings are forecast to rise 11% this fiscal year before accelerating further.
Arup Datta, portfolio manager at Mackenzie Investments, continues to hold a positive view. “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,” he said.
Datta emphasized Microsoft’s strengths: “Its quality characteristics have always been and continue to be stellar. It’s tremendously innovative and continues to have very robust long-term growth potential.”
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