(Bloomberg) — Shares of Microsoft Corp. have lost their luster in recent months as some investors cool the artificial intelligence trade and look for better value elsewhere in the sector.
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Shares of the software company have fallen less than 1% over the past six months, compared with a nearly 10% gain for the Nasdaq 100 Index. With a 0.6% decline Tuesday, the stock is near 9% below its all-time high, while an exchange-traded fund that tracks software companies closed at a record Monday. This underperformance came as Microsoft reported mixed results in its most recent quarter and AI lost momentum as a driver of stock market gains.
“There is some AI fatigue when it comes to companies like Microsoft, given the incredible journey they have had,” said Neville Javeri, senior fund manager at Allspring Global Investments . Investors “need further evidence on demand for AI products and services for the rally to hold.”
DA Davidson analysts were also more cautious about Microsoft.
“The competition has largely caught up with Microsoft on the AI front, reducing the justification for the current premium valuation,” analyst Gil Luria wrote in a note last week, citing cloud rivals Amazon.com Inc. and Alphabet Inc. AI “will make it difficult for MSFT to continue to outperform,” Luria said, lowering the stock’s rating to neutral from buy.
Microsoft trades at 31 times estimated earnings and nearly 11 times projected revenue. Although both multiples are down from recent highs, they are well above their 10-year average. The Nasdaq 100 trades at less than 26 times forward earnings and less than 5 times sales.
The stock also faced unfavorable comparisons to Oracle Corp., which became a popular alternative for software investors after its latest results showed strong AI tailwinds. Oracle offers a lower multiple, trading at 26 times projected earnings, prompting several companies to upgrade the stock over the past month.
“Oracle is sort of the new kid on the block because it’s more in the early rounds of the growth curve,” said Christopher Ouimet, portfolio manager at Logan Capital Management. “More investors are rolling up their sleeves to look at it, while with Microsoft they are sharpening their pencils focusing on how Azure grows and when it will see a better return on its investments.”
In contrast, Microsoft’s July results revealed a slowdown in its Azure cloud computing service. Although it showed growth attributable to AI, the figure was lower than some had hoped, highlighting concerns about when Microsoft will see a more pronounced return on investment in AI.
Even after a few weaker months, Microsoft shares remain up 14% this year — and the recent underperformance follows a 57% gain in 2023. The vast majority on Wall Street remains optimistic, at over 94%. of analysts considering Microsoft shares a buy. , according to data compiled by Bloomberg.
The company’s long-term prospects are also still viewed favorably. Revenue is expected to grow 14.5% in fiscal 2025 and accelerate over the next several years, reaching a pace of 19% by 2028. Net earnings per share are also expected to grow by double digits in over the next few years.
Against this backdrop, investors like Allspring’s Javeri and Logan Capital’s Ouimet remain positive on stocks for the long term, despite near-term challenges.
“It’s never surprising to see a stock take a break, especially after a strong performance and as the market rally widens, but it’s hard to find a company of this size and quality that will grow at this rate. level over the next few years,” Ouimet said. said. “Microsoft is so well positioned that the further back it goes, the more attractive it looks.”
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Shares of Meta Platforms Inc. just closed out the third quarter up 13.5%, marking their seventh straight quarter of gains. It’s the longest such streak for parent company Facebook since 2016. The stock is up more than 375% in the seven-quarter rally, with the recent strength reflecting the company’s potential to benefit from AI. Stocks are up more than 60% this year.
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–With the help of Subrat Patnaik.
(Updates for market opening.)
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