Some of the most well-known and established artificial intelligence (AI) stocks are down significantly from their all-time high for no good reason. This opens up rare investment opportunities that hardly ever appear. One that I'm eyeing right now is Microsoft (MSFT +0.60%). Microsoft is down around 25% from its all-time high, something that isn't common.
The last time Microsoft was down 25% from its all-time high was during the late 2022, early 2023 marketwide sell-off when investors assumed we were headed straight for a recession, and market sentiment was extremely negative. While it's not all sunshine and rainbows in the world right now, there isn't a lot going on that will disrupt Microsoft's business. In fact, with all of the AI spending going on, Microsoft is expected to grow even more.
I think this sell-off is a no-brainer buying opportunity, and Microsoft could easily roar back by the end of 2026 to establish a new all-time high.
Image source: Getty Images.
Microsoft is benefiting big-time from the AI build-out
Just because Microsoft's stock is down 25% doesn't mean it needs to gain 25% to reach a new all-time high. It actually requires a 33% gain, which is an impressive return for any stock for just a year's investment. But what will Microsoft have to do to return to those levels?
I think it just needs to maintain its course.
Microsoft is taking a bit of a hands-off approach in the AI arms race. Instead of directly competing by building its own generative AI model, Microsoft is choosing to stay neutral. While it owns 27% of OpenAI, the makers of ChatGPT, Microsoft also hosts all sorts of other generative AI models, such as Grok from xAI, Anthropic's Claude, and DeepSeek R1, among others. Microsoft is positioning itself as the place where you can gain access to nearly any generative AI model you could want, and by not forcing a model on the user, it gives them greater flexibility.
NASDAQ: MSFT
Key Data Points
Microsoft is recognizing this revenue through its cloud computing platform, Azure. Azure has been the highlight of Microsoft's business over the past decade and has consistently grown at least 20% or greater during that time frame. However, cloud computing is seeing unprecedented growth thanks to the AI build-out.
During the second quarter of fiscal year 2026 (ended Dec. 31), Azure's revenue increased an impressive 39% year over year. However, that figure could have been higher if Microsoft had used some of its newly installed computing equipment for external use rather than for internal use. It also has a $625 billion backlog, showcasing that there's a ton of contracted usage still to come.
Overall, in Q2, Microsoft's revenue rose 17% year over year and beat expectations laid out in Q1. There isn't really anything to nitpick, because all of Microsoft's hefty AI spending is already showing a significant return on investment through its cloud computing growth.
As a result, Microsoft is about as much of a no-brainer of a buy as it gets. But just how cheap is this price?
Microsoft has always traded at a premium valuation
Despite Microsoft's 25% sell-off, it still trades at a premium valuation to the market. At 25.6 times trailing earnings and 24.5 times forward earnings, it's still more expensive than the S&P 500, which trades for 24.6 times trailing earnings and 21.7 times forward earnings. This shouldn't come as a surprise, as Microsoft has always traded at a premium and has earned that status through consistent execution. However, the earnings ratio can be skewed by one-time effects and gains on investments (like OpenAI). As a result, I think using the operating price-to-earnings ratio is a better way to assess Microsoft's valuation from a historical standpoint.
MSFT Operating PE Ratio data by YCharts
Microsoft's stock is near decade lows on this valuation measure, and you need to rewind to 2019 to find a time when it consistently traded this cheaply, outside of one-time dips. I think Microsoft's stock will rally throughout the year and return to normal valuation levels, resulting in impressive stock returns.
