Microsoft’s AI Ambitions Under Scrutiny
As Microsoft’s stock struggles to regain its footing, investors are growing increasingly anxious about the company’s massive investments in artificial intelligence. With tens of billions of dollars poured into AI research and development, the question on everyone’s mind is: when will these investments start paying off?
A Slowing Adoption Rate
The market is beginning to realize that AI adoption will take longer than initially expected, and near-term returns may not be as robust as hoped. Microsoft’s capital expenditures this fiscal year include tens of billions of dollars on data centers, but the company’s heavy spending has yet to yield the desired results. The stock has stumbled, falling over 7% below its record high set in July, and its gain since the start of 2024 has underperformed the Nasdaq 100 Index.
Competition Heats Up
Microsoft’s AI services, such as Copilot, are facing stiff competition from the likes of Google Gemini, ChatGPT, and Meta AI. According to Wedbush’s quarterly consumer internet survey, only 13% of respondents used Microsoft’s Copilot in the past three months, compared to 25% for Gemini. The company has rebranded its main chatbot for businesses twice, in an effort to persuade people to use it.
A Price Hike for Office Apps
In a bid to boost revenue, Microsoft announced a 30% price hike for its suite of Office apps, which come with access to AI tools. However, this move may not be enough to offset the slower-than-expected adoption of its AI services.
Wall Street Remains Bullish
Despite the challenges, Microsoft remains a consensus favorite on Wall Street. Over 90% of analysts recommend buying the stock, with an average price target pointing to upside of almost 20% over the coming 12 months. Bank of America expects software to outperform this year, naming Microsoft as one of its top picks.
A Long-Term Bet
While AI adoption may not be linear, many investors believe it will ultimately be massive. “AI adoption is the question on everyone’s mind, but we still find the stock highly attractive given its growth,” said Christopher Ouimet, a portfolio manager at Logan Capital Management. With revenue expected to grow about 14% this fiscal year and earnings expanding at a double-digit pace for the next several years, Microsoft’s long-term prospects remain promising.
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