Why Microsoft's Recent Slump Might Be Setting It Up for Unbeatable Gains

Over the last year, Microsoft Corporation has performed as the poorest among major tech companies, yet according to D.A. Davidson’s analyst Gil Luria, it holds potential to lead the group moving ahead.

On Thursday, Luria raised Microsoft’s rating to "buy" from "neutral," simultaneously increasing his price objective to $450 from $425. According to him, the company is becoming more prudent regarding how it allocates capital resources. Additionally, considering its stronger focus on enterprise solutions compared to competitors, Luria believes it may be better prepared for potential reductions in consumer expenditure.

In his comparison, Luria looked at Microsoft alongside what he refers to as the Magnificent Six — the leading tech giants apart from Tesla Inc.

Among the six stocks mentioned, Microsoft is the sole one that has decreased in value over the last year, and it has underperformed compared to its peers in the six-month period following Luria’s downgrade. The stock's recent downturn seems to be due to the impact of increased capital expenditures in prior periods, according to him. However, he pointed out that the firm has indicated plans for stable sequential capital expenditure levels in the coming few quarters and projected slower growth heading toward fiscal 2026.

CEO Satya Nadella "signaled an end to the escalation," according to Luria’s client memo. Additionally, during a recent appearance on the "Dwarkesh Podcast," Nadella mentioned his intention to lease additional data center capacity in 2027 and 2028 instead of constructing new facilities.

Luria pointed out additional indications that Microsoft is reducing its capital expenditures, citing CoreWeave’s regulatory documents filed for their upcoming public offering. According to these papers, Microsoft was responsible for 62 percent of CoreWeave’s income. This trend is reinforced by the details surrounding OpenAI’s Stargate initiative.

Luria stated that "The whole Stargate initiative hinges on OpenAI's quest for additional training resources since Microsoft has lost interest."

Significantly, Microsoft retains exclusivity for the preferred OpenAI ChatGPT inference tasks, excluding the unpredictable training tasks.

Also read: What does the upcoming public listing of CoreWeave, the cloud services company, entail for next week?

Luria thinks that besides Nvidia, Microsoft is the most well-prepared major tech company to handle a possible downturn in consumer expenditure.

“He stated that although the degree of the consumer slowdown remains uncertain, it seems more probable than not. This scenario would imply lower risks for Microsoft’s profit forecasts compared to those of other large market leaders, positioning it as the most likely among the Mag 6 to adopt a defensive stance.”

Microsoft stocks showed a slight decline during early trading on Thursday.