Microsoft (MSFT) stock is trading at its cheapest valuation relative to the S&P 500 in over a decade, down approximately 28% from its July 2024 peak of $555 per share. This selloff has erased roughly $1 trillion in market capitalization, with the stock currently near $401. The decline has been largely driven by market fears of an AI-driven "software apocalypse," where AI agents could automate tasks currently handled by paid software subscriptions.
However, Microsoft's recent financial performance contradicts this narrative. For fiscal Q2 2026 (ended December 31), the company reported revenue of $81.3 billion, exceeding its own guidance range of $79.5–$80.6 billion and representing 17% year-over-year growth. Full-year earnings per share are forecast to rise 21% to $16.48.
The standout performer was Microsoft's Azure cloud platform, which saw revenue grow by 39% last quarter. The company stated that growth was limited only by data center capacity constraints. To address this, Microsoft plans to spend over $100 billion in capital expenditures this fiscal year to expand its infrastructure.
Concurrently, Microsoft is pursuing a massive AI infrastructure project in Abilene, Texas, known as the "Stargate Project." The planned 1,000-acre data center complex could ultimately scale to about 2 gigawatts of power capacity, which is viewed as critical for supporting energy-intensive AI workloads and expanding Azure's AI ecosystem.
Despite these strong fundamentals and expansion plans, Microsoft's stock momentum remains weak. The company's quality score, a measure of financial health and operational efficiency, rose to a new high of 89.96 this week. In contrast, its momentum score stands at just 20.40. The stock is down 16.91% year-to-date and 21.19% over the past six months, though it remains up 4.85% over the past year.
Microsoft's strategic position in AI is further bolstered by its stake in OpenAI. Following OpenAI's latest funding round, which valued the company at $840 billion, analysts estimate Microsoft's stake could be worth over $200 billion. The "software apocalypse" narrative also recently softened after Anthropic, a key AI agent player, demonstrated its agents working alongside tools like Excel and PowerPoint rather than replacing them.
The company faces additional headwinds, including legal and geopolitical risks. Microsoft has filed an amicus brief supporting Anthropic against a proposed "supply chain risk" designation by the Department of War, warning of potential disruptions to defense contracts. Rising tensions in the Middle East have also increased concerns about infrastructure-focused cyber threats targeting large technology platforms.
Analysts are divided on the stock's outlook. RBC analyst Rishi Jaluria has called Microsoft "very undervalued," citing its strong position across Azure, security, data, LinkedIn, and gaming. Melius Research analyst Ben Reitzes recently downgraded the stock to Neutral but acknowledged that much of the bear case may already be priced in. With a forward P/E of around 22x—below the S&P 500 average and companies like Coca-Cola and Home Depot—Microsoft's valuation is at a level not seen since January 2023, after which the stock gained 73% over the following 12 months.
