Microsoft (NASDAQ:MSFT) stock has slumped by 20% this year, making it the worst-performing Magnificent 7 company. The Roundhill Magnificent 7 ETF (MAGS) is barely changed, while other top names like Alphabet, Nvidia and Amazon are positive for the year.
Microsoft has slipped by over 30% from its all-time high, with its valuation slumping from $3.88 trillion to $2.82 trillion.
Microsoft Stock Has Slumped as AI Spending and SaaSpocalypse Concerns
MSFT has been in a strong downtrend as investors question its data center spending and the returns on investment. In its recent earnings report, the company predicted that its capital expenditure will jump to $190 billion this year, with $25 billion of this being because of higher costs.
Amazon (NASDAQ:AMZN) plans to spend $200 billion, while Alphabet (NASDAQ:GOOG) and Meta Platforms (NASDAQ:META) will spend $190 billion and $125 billion, respectively. In total, these four companies are expected to spend over $700 billion this year.
Investors are concerned that it will take years for the company to achieve a substantial return on investment. Its planned capital expenditure for the year is 61% higher than what it made last year.
As such, there are concerns that it might sell shares to raise capital. Alphabet recently raised $84 billion, while Nvidia (NASDAQ:NVDA) raised $25 billion. Meta Platforms is also considering raising billions of dollars in cash.
The most recent results showed that Microsoft’s revenue rose by 13% in the first quarter. Its personal computing revenue slowed by 1% to $13.2 billion, while its productivity and business processes, and intelligent cloud divisions rose by 17% and 30%, respectively. It now expects that its operating margin will drop to 44% from 46.3%.
There are also concerns about SaaSpocalypse because Microsoft is one of the top software companies in the world. SaaSpocalypse is the rising fear that software companies will be disrupted by artificial intelligence tools. These fears, however, are likely overblown as Microsoft provides critical software like Office that will be hard to disrupt.
At the same time, there are concerns that its Copilot is losing market share to other fast-growing tools like ChatGPT and Anthropic.
Microsoft Has Some Potential Catalysts
Despite the ongoing Microsoft stock retreat, it has some notable catalysts ahead. The company will benefit from the upcoming OpenAI and Anthropic IPOs. Microsoft owns a position worth over $125 billion in OpenAI, which may jump sharply after its IPO. It also invested $5 billion in Anthropic, which plans to go public this year.
MSFT has also become highly undervalued, with its forward price-to-earnings falling to 22. This number is much smaller than the technology sector median of 32. Its five-year average was about 33.
Wall Street analysts are also bullish on Microsoft. Cantor Fitzgerald boosted the stock target to $502, while TD Cowen, Barclays, Wells Fargo, and Wedbush hiked the targets to over $500. As a result, the average analyst’s target among analysts is $561, up by 47% from the current level.
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