A Downgrade for Microsoft: Has The Company Lost Its Edge?

Microsoft Corp. (NASDAQ: MSFT) is, was, and (barring disaster and then some) shall be one of the biggest corporations on the planet. It is one of the largest tech giants and often a global leader in whatever business it attempts.

Or so most of us thought. Microsoft recently received a downgrade from a few analysts because of fears about its competitiveness in the AI market. More specifically, one note is that Microsoft is becoming more reliant upon Nvidia. It also fell in price recently, making investors further wonder what’s going on.

And there is truth to these concerns. If Microsoft wants to do more in the AI space, it will need Nvidia. Additionally, it isn’t as competitive as it used to be in AI (though AI developments are rapid, and the news can change overnight).

Yet there is another strong point to consider: perhaps more than any other tech company, Microsoft’s future isn’t solely tied to AI. It is still a market leader in software. Its intelligent cloud business is a key source of revenue. It is working on and investing heavily in AI, but if all of Microsoft’s AI efforts were to entirely fail (unlikely), Microsoft would survive. The same cannot so easily be said of other companies in the space.

Additionally, the downgrade is only from a few sources. Most analysts we watch at WallStreetZen still consider Microsoft a strong buy as of the end of July. We will watch for future changes in light of this news, but the consensus is still positive on Microsoft. It will be important to see if other analysts change their minds, but they likely would have done so if this was an emergency situation, considering Microsoft’s size and status.

Price forecasts are also optimistic, with the average forecast suggesting a 18.47% increase in the share price over the next year. The max forecast places the price at $600 in 12 months.

Additionally, MSFT’s Zen Score, which is a shorthand for our measure of the fundamentals of a stock, is a strong 55 compared to the industry average of 30. 

If you break down the score, it scores poorly on its current valuation but superbly with its financials. It scores well in forecast, performance, and dividend. By all metrics, it is as stable an investment as stocks come (as one might expect from Microsoft at this point). That stability will make it an attractive option to some investors, and the slight price downturn could make now a good time for interested buyers.

The Takeaway: If you were investing in Microsoft because of its AI potential and valuation, it might be the right call to double-check your investment and see what other options are out there. (Check out our guide on how to invest in AI here.) Additionally, its growing dependence on Nvidia is concerning. Yet, if you’re more interested in the other fundamentals of Microsoft and its other businesses outside of AI, there are still a lot of positive things analysts have to say.

This is one to watch carefully and get multiple opinions on. To keep up with Microsoft and other AI and tech companies, you’ll need help unless you want to read and watch headlines all day (and you have better things to do). To get your news updates, the latest analyst ratings, and an unlimited watchlist, get WallStreetZen Premium today.

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