Microsoft’s stock, currently trading at around $490, is being viewed as a potential recovery play for 2026 after two years of underperformance. Year-to-date (YTD) gains stand at approximately 15%, lagging behind the broader S&P 500 Index and the tech-heavy Nasdaq Composite Index. Despite a gain of only 12% in 2024, Microsoft has struggled to keep pace with its technology peers and the overall market.
The “Magnificent 7” group of tech stocks, which previously drove market rallies in 2023 and 2024, has also faltered, with none making it into the top 20 gainers of the S&P 500 Index in 2025. The group, which includes prominent names such as Alphabet and Nvidia, has experienced a collective downturn, leaving only Alphabet and Nvidia significantly outperforming their average S&P 500 peers.
Analyst Optimism Amid Challenges
Despite the challenges, Dan Ives, a well-known analyst at Wedbush Securities, has labeled Microsoft a “compelling buy.” He projects the stock could rise to **$625** in 2026. This optimism comes even as Microsoft navigates concerns regarding its escalating capital expenditures (capex) in the artificial intelligence (AI) sector. The company announced a record capex of nearly **$35 billion** in the first quarter of its fiscal year 2026, which ended in September.
While Microsoft’s dividend yield of **0.75%** is modest, it remains the highest among the Magnificent 7 stocks and places the company on the verge of becoming a Dividend Aristocrat, a title given to firms that have consistently raised their dividends for **25 consecutive years**. This dividend strategy attracts investors, especially in a sector where many tech companies do not pay dividends.
The broader tech landscape is seeing rising capex as companies like Amazon, Meta Platforms, and Alphabet ramp up their spending amid the ongoing AI arms race. Microsoft’s stock has been under pressure, in part due to Alphabet’s successes with its AI initiatives. Alphabet’s advancements with its Gemini project have put strain on Microsoft, which is a significant investor in OpenAI, the company behind ChatGPT.
Market Outlook and Strategic Positioning
Interestingly, the analyst consensus remains strong for Microsoft, with a “Strong Buy” rating from **48 analysts** surveyed by Barchart. The stock is currently trading below the lowest target price of **$490**, while the average target price is approximately **$629.23**, suggesting a potential upside of nearly **30%**. Ives’ target aligns closely with the consensus, and other firms such as DA Davidson and Jefferies have maintained bullish outlooks with target prices of **$675** and **$650**, respectively.
At a forward price-to-earnings (P/E) multiple of **30.6x**, Microsoft’s valuation appears balanced, although its P/E-to-growth (PEG) ratio stands at **1.82x**, reflecting the impact of increased AI capex on profitability. Critics, including investor Michael Burry, have raised concerns regarding tech companies inflating the useful life of AI chips, leading to higher expected depreciation expenses.
Despite these concerns, there are positive signals for Microsoft. The company’s Windows and Office divisions are likely to benefit from a resurgence in PC sales, driven by an aging installed base and the launch of AI-driven PCs. The end of support for Windows 10 is expected to encourage users to upgrade to Windows 11, further boosting sales.
Additionally, demand for subscriptions is on the rise, enhancing Microsoft’s revenue potential. The cloud business continues to grow rapidly, with Microsoft narrowing the gap with market leader Amazon. During its recent earnings call, Microsoft reported that its commercial cloud remaining performance obligations (RPO) surged **50%** to **$400 billion** at the end of September, demonstrating strong demand for its services.
Overall, while Microsoft has faced headwinds in recent years, its strategic positioning, coupled with a resilient business model, suggests that the stock may offer opportunities for investors willing to navigate its current challenges. As such, many analysts remain constructive on Microsoft as it heads into 2026, with expectations for double-digit returns in the coming year.
