Many investors have been kicking Microsoft (MSFT +1.78%) to the curb. It's down by almost 20% year to date as fellow tech stocks continue to rally. The State Street Technology Select Sector SPDR ETF's 28% year-to-date rally truly captures how much Microsoft has fallen in the eyes of many investors.
However, it may be too early to count Microsoft out, especially since its strong fundamentals remain intact.
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Microsoft is still gaining market share thanks to AI
Perhaps some growth investors have given up on Microsoft because it's not doubling revenue year over year like some of the top-performing AI stocks. However, it's still gaining ground on its peers thanks to AI, which has translated into steady financial growth.
Revenue inched up by 18% year over year in Microsoft's fiscal 2026 third quarter. CEO Satya Nadella said the company's AI business reached an annual revenue run rate of $37 billion, a 123% year-over-year increase. Microsoft Cloud once again remained the main growth driver, and it was up by 29% year over year.
Microsoft is also ahead of the curve in agentic AI, with Copilot and AI agents integrated into many Microsoft products. The company's AI investments have translated directly into rising revenue and profits. Microsoft's net income grew 23% year over year, demonstrating it can expand profit margins while gaining market share.
NASDAQ: MSFT
Key Data Points
The valuation is extremely low
A stock's valuation influences whether it is a good deal. Microsoft's growth numbers wouldn't be impressive if the stock carried a 100 P/E ratio. That's a much higher valuation than some of the fastest-growing companies. However, Microsoft only trades at a 23.3 P/E ratio. The company's P/E ratio sat in the mid-30s for most of 2025.
Tech investors have been spoiled with mind-boggling revenue and net income growth rates. It makes Microsoft's numbers feel pedestrian, but that's the exact setup that creates deep value opportunities.
Grandview Research projects a 16% CAGR for the cloud computing market from now until 2033. Microsoft is outpacing that growth rate, and as cloud continues to grow, it will continue to make up an outsize percentage of Microsoft's total business. As that happens, some of Microsoft's underperforming segments won't drag the company down as much, translating into higher growth numbers moving forward.
Many "Magnificent Seven" stocks have lower P/E ratios than they had a few years ago. Microsoft is the second cheapest stock among these options, only being edged out by Meta Platforms' 20.6 P/E ratio, another stock that has been surprisingly discarded by many investors despite strong fundamentals.
Value isn't always recognized right away, and that gives Microsoft investors the opportunity to buy shares at bargain prices before the next rally.
