Microsoft Faces Stock Troubles Amid AI Competition and Lower Guidance

The past week has not been kind to Microsoft (NASDAQ: MSFT). Recent developments related to a Chinese start-up, DeepSeek, which unveiled cost-effective AI models, have put Microsoft’s significant investments in artificial intelligence (AI) under the spotlight, causing its stock to plummet.

Additional pressure on Microsoft shares followed the announcement of its fiscal 2025 second quarter (ending December 31, 2024) results on January 29. While the company surpassed Wall Street’s expectations for earnings and revenue, its revenue forecast for the current quarter fell short of analysts’ projections.

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These factors explain why Microsoft stock has decreased by over 5% since January 27, when DeepSeek’s announcement shook the AI sector. This raises a question for investors: Is this a chance to buy into a promising company at a lower price? Let’s explore.

AI Fuels Microsoft’s Cloud Revenue Surge

Microsoft’s revenue grew by 12% year-over-year last quarter, with its cloud sector significantly contributing to this growth. The Intelligent Cloud business saw a remarkable 19% year-on-year revenue increase. Additionally, the demand for AI applications available on Microsoft’s Azure cloud services contributed a significant 13 percentage points to this growth.

The company’s AI services revenue skyrocketed by 157% last quarter, exceeding its own expectations. However, demand outstripped their capabilities, causing the 31% rise in Azure revenue to fall slightly below what analysts had anticipated.

Looking ahead, the demand for Microsoft’s AI solutions shows promise, as the company is experiencing a notable rise in contract sizes and bookings. The quarter marked a substantial 67% increase in commercial bookings, driven largely by “Azure commitments from OpenAI.” This figure is a sharp increase compared to the 17% growth in commercial bookings during the same period last year.

Commercial bookings reflect new contracts signed with major clients, signaling strong future growth potential for Microsoft. The firm also reported remaining performance obligations (RPO) of $298 billion, which represents the value of contracts to be fulfilled in the future, marking a 34% year-over-year increase.

To meet these contractual obligations, Microsoft plans to escalate its infrastructure investments, with capital expenditures of $22.6 billion last quarter, surpassing the $20.95 billion analyst average forecast.

More than half of these outlays are directed toward long-lived assets expected to generate revenue over the next 15 years and beyond. The remainder is primarily allocated to crucial server infrastructure like graphics processing units (GPUs) and central processing units (CPUs), underscoring the urgency to satisfy its substantial RPO.

This spending spree explains the slower earnings growth relative to revenue last quarter. Fortunately, Microsoft anticipates that its AI infrastructure will meet rising demand by the end of this fiscal year, a shift that could herald stronger growth moving forward.

Should Investors Consider Buying Microsoft Stock Now?

The substantial RPO figure more than exceeds Microsoft’s total revenue of $254 billion over the past year. Analysts expect RPO growth to continue accelerating, especially as the cloud AI services market is projected to grow nearly 40% annually through 2030, as stated by Grand View Research.

Given these dynamics, analysts predict an 11% rise in Microsoft’s earnings for fiscal 2025, estimating earnings per share (EPS) at $13.15.

MSFT EPS Estimates for Current Fiscal Year data by YCharts.

The chart suggests further earnings growth of 14% and 17% over the next two fiscal years. Consequently, the recent decline in stock prices could be an appealing entry point for potential investors, especially considering Microsoft currently trades at 33 times earnings, consistent with the tech-heavy Nasdaq-100 average.

Should Microsoft effectively harness the immense opportunities in the burgeoning cloud AI services market, its stock may have a promising outlook.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft. The Motley Fool also recommends long January 2026 $395 calls and short January 2026 $405 calls on Microsoft. The Motley Fool maintains a disclosure policy.

The views and opinions expressed herein belong to the author and do not necessarily reflect those of Nasdaq, Inc.