Microsoft's Cloud Stumble Becomes Market's Biggest Problem
Microsoft is dragging down the S&P 500 more than any other stock this year. The software giant has fallen 12% in 2026, accounting for the bulk of the index's 8.3% gain, according to Bloomberg data. Its two main cloud competitors, Alphabet and Amazon, are posting double-digit gains.
The company's cloud-computing division reported tepid results in late April. Azure growth lagged behind rivals, raising questions about Microsoft's position in artificial intelligence and the scale of its spending in that area. Microsoft also forecast $190 billion in capital expenditures through year-end, more than Wall Street expected.
Investors are questioning whether Microsoft can transition successfully to an AI-focused business. Howard Chan, CEO of Kurv Investment Management, said the company has "a lot of problems to solve" and investors haven't received good answers on its ability to make that shift.
The broader concern extends across software companies. Investors worry that generative AI services from companies like Anthropic and OpenAI could replace legacy products. There's also concern that AI tools will let people write their own code, reducing demand for traditional software.
Microsoft's core business tools face particular pressure. "I don't think AI will fully replace Word or Excel, but those tools are a major pipeline for selling compute with Azure," Chan said. The company needs to improve multiple parts of its business simultaneously, which raises the difficulty level.
Wall Street remains broadly confident Microsoft will solve these problems. The company is expected to post 17% revenue growth in fiscal 2026, ending in June, up from 15% the prior year. Net income is projected to grow 26% in fiscal 2026, though that will slow to 12% growth in 2027.
Analysts have raised their earnings and revenue estimates for Microsoft fairly aggressively over the past 12 months. Of 71 analysts tracked by Bloomberg, 67 have buy ratings. The average price target suggests shares will rise 32% over the next 12 months.
Microsoft's valuation has compressed significantly. The stock trades at 22 times estimated earnings, down from 35 in July 2024. That's below the 10-year average of about 27 and represents a discount to the broader market.
Billionaire investor Bill Ackman disclosed that his firm, Pershing Square, built a $2.1 billion stake in Microsoft while reducing its Alphabet holdings. He said concerns about the company's growth are "misplaced."
Tom Plumb, manager of the Plumb Balanced Fund, said this year's selloff has been overdone. "Results have been lumpy, and it may take a couple more quarters until we see stronger organic growth, but I think the challenges have been overstated," he said. At current valuations, he sees Microsoft as offering above-market growth at a market-level price.
Microsoft shares ticked up Thursday after reports that Anthropic was in early talks to rent servers powered by Microsoft-designed AI chips, signaling potential demand for the company's infrastructure.
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