Software Stocks Decline 30% Amid AI Concerns
Written by Emily J. Thompson, Senior Investment Analyst
Updated: 1h ago
0mins
Should l Buy MSFT?
Source: Fool
- Market Overreaction: Nvidia CEO Jensen Huang argues that the sell-off in software stocks due to the introduction of AI tools is irrational, as these tools are designed to work alongside existing software rather than replace it, indicating a lack of rationality in the market's pessimism towards the software industry.
- Microsoft's Strong Performance: Microsoft has seen a 160% increase in paid users for its generative AI copilots in products like Microsoft 365, and despite a 27% drop from its high, its adjusted earnings grew by 24% in the last quarter, showcasing the company's robust performance in the AI sector.
- AppLovin's Rapid Growth: AppLovin's Axon machine learning engine provides a competitive edge in its ad tech software, and although its stock is down 52%, its earnings surged by 96% in the last quarter, indicating strong potential in the advertising technology space.
- HubSpot's Innovative Leadership: HubSpot has become the first CRM vendor to integrate its platform with three leading generative AI tools, and despite a 73% decline in stock price, its adjusted earnings increased by 22%, demonstrating its ongoing innovation capabilities in customer relationship management.
Trade with 70% Backtested Accuracy
Stop guessing "Should I Buy MSFT?" and start using high-conviction signals backed by rigorous historical data.
Sign up today to access powerful investing tools and make smarter, data-driven decisions.
Analyst Views on MSFT
Wall Street analysts forecast MSFT stock price to rise over the next 12 months. According to Wall Street analysts, the average 1-year price target for MSFT is 631.36 USD with a low forecast of 500.00 USD and a high forecast of 678.00 USD. However, analyst price targets are subjective and often lag stock prices, so investors should focus on the objective reasons behind analyst rating changes, which better reflect the company's fundamentals.
34 Analyst Rating
32 Buy
2 Hold
0 Sell
Strong Buy
Current: 393.670
Low
500.00
Averages
631.36
High
678.00
Current: 393.670
Low
500.00
Averages
631.36
High
678.00
About MSFT
Microsoft Corporation is a technology company that develops and supports software, services, devices, and solutions. Its Productivity and Business Processes segment consists of products and services in its portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. It comprises Microsoft 365 Commercial products and cloud services; Microsoft 365 Consumer products and cloud services; LinkedIn, and Dynamics products and cloud services. The Intelligent Cloud segment consists of its public, private, and hybrid server products and cloud services. It comprises server products and cloud services, including Azure, and enterprise and partner services, including Enterprise Support Services. Its More Personal Computing segment primarily comprises Windows and Devices, including Windows OEM licensing; Gaming, including Xbox hardware and Xbox content; Search and news advertising, comprising Bing and Copilot, Microsoft News, and Microsoft Edge.
About the author
Emily J. Thompson
Emily J. Thompson, a Chartered Financial Analyst (CFA) with 12 years in investment research, graduated with honors from the Wharton School. Specializing in industrial and technology stocks, she provides in-depth analysis for Intellectia’s earnings and market brief reports.
Microsoft Faces Challenges and Opportunities in AI Business
- Performance Concerns: Microsoft's fiscal Q2 2026 results revealed strong overall performance; however, modest weaknesses in AI software and cloud services led to a more than 10% drop in stock price in one day, raising investor concerns about future growth.
- Copilot License Sales Growth: As of Q2 2026, Microsoft 365's Copilot licenses reached 15 million, doubling year-over-year but representing only a 3.7% market penetration, indicating limited market uptake that could hinder future revenue growth.
- Azure Revenue Growth Slowdown: Azure's revenue grew 39% year-over-year in Q2, surpassing Wall Street's 37.1% forecast, yet slower than the previous quarter's 40%, suggesting a potential loss of momentum that may affect investor confidence.
- Data Center Capacity Shortage: Microsoft's order backlog surged 110% year-over-year to $625 billion, with 45% from OpenAI, which may limit Azure's expansion and increase investment risks due to reliance on external funding and revenue growth.
See More
Microsoft Reports Strong Earnings Amid Stock Decline
- Strong Earnings but Stock Drop: Microsoft reported strong results for its fiscal 2026 second quarter, yet its stock fell over 10% due to modest weakness in AI software and cloud services, now down 22% from its record high, reflecting market concerns about future growth.
- Slow Copilot License Sales: As of the fiscal 2026 second quarter, only 15 million Copilot licenses for Microsoft 365 were sold, doubling year-over-year but representing a mere 3.7% market penetration, indicating insufficient market uptake that could hinder future revenue growth.
- Azure Growth Deceleration: Azure achieved a 39% year-over-year growth rate in the second quarter, exceeding Wall Street's expectations, yet slower than the previous quarter's 40%, with a staggering 110% year-over-year increase in order backlog to $625 billion due to data center capacity shortages, highlighting potential growth bottlenecks.
- Attractive Stock Valuation: With a current P/E ratio of 26.5, Microsoft is at its lowest valuation in three years, significantly lower than the Nasdaq-100's 32.8, and analysts project earnings to rise to $19.06 per share in fiscal 2027, resulting in a forward P/E of just 22.4, suggesting a buying opportunity for long-term investors.
See More
Analysts Downgrade Microsoft and Amazon Ratings Amid AI Competition
- Microsoft Downgrade: Stifel downgraded Microsoft from Buy to Hold, slashing the price target from $540 to $392 due to cloud supply constraints and rising investments, projecting a gross margin drop to about 63% for FY27, indicating increased near-term profitability pressure.
- Amazon Cloud Competitiveness Decline: DA Davidson downgraded Amazon to Neutral with a price target of $175, highlighting AWS's growth lagging behind Microsoft and Google, and suggesting Amazon may need to invest $50 billion to remain competitive in the AI-driven market.
- Tesla Robotaxi Potential: Wolfe Research forecasts Tesla's robotaxi platform could generate $250 billion in annual revenue by 2035, although near-term earnings may face pressure, the long-term ROI remains attractive, driven by autonomous vehicle adoption.
- AMD Long-Term Outlook Positive: Truist Securities advises to “buy the weakness” in AMD, projecting over $20 EPS by 2030 despite a choppy Q4, as strong demand in data center and AI sectors supports its long-term growth narrative.
See More
Amazon AWS Maintains Cloud Leadership Amidst Competition
- Cloud Growth: Amazon's AWS achieved a 24% year-over-year growth in 2025, adding $21.2 billion in revenue, although this was behind Google Cloud's 36% and Microsoft's Azure's 39%, indicating its sustained leadership in the cloud market despite competitive pressures.
- Capital Expenditure Plans: Amazon plans to invest $200 billion in capital expenditures in 2025, primarily for AWS and AI workloads, which has raised skepticism among investors; however, this move underscores the company's commitment to maintaining its market leadership.
- Profitability Comparison: AWS's operating income reached $45.6 billion in 2025, significantly exceeding Google Cloud's $13.9 billion, highlighting Amazon's profitability advantage in the cloud services sector, even as its overall market share declines.
- Cash Flow Situation: Despite generating $139.5 billion in operating cash flow in 2025, the anticipated $200 billion capital expenditure is expected to lead to negative free cash flow in 2026, yet the company continues to execute strongly, with quarterly revenue rising 14% to $213.4 billion.
See More
Software Stocks Decline 30% Amid AI Concerns
- Market Overreaction: Nvidia CEO Jensen Huang argues that the sell-off in software stocks due to the introduction of AI tools is irrational, as these tools are designed to work alongside existing software rather than replace it, indicating a lack of rationality in the market's pessimism towards the software industry.
- Microsoft's Strong Performance: Microsoft has seen a 160% increase in paid users for its generative AI copilots in products like Microsoft 365, and despite a 27% drop from its high, its adjusted earnings grew by 24% in the last quarter, showcasing the company's robust performance in the AI sector.
- AppLovin's Rapid Growth: AppLovin's Axon machine learning engine provides a competitive edge in its ad tech software, and although its stock is down 52%, its earnings surged by 96% in the last quarter, indicating strong potential in the advertising technology space.
- HubSpot's Innovative Leadership: HubSpot has become the first CRM vendor to integrate its platform with three leading generative AI tools, and despite a 73% decline in stock price, its adjusted earnings increased by 22%, demonstrating its ongoing innovation capabilities in customer relationship management.
See More
Comparative Analysis of IEMG and SPGM ETFs
- Identical Expense Ratios: Both IEMG and SPGM feature a competitive expense ratio of 0.09%, appealing to cost-conscious investors looking for low-cost investment options.
- Performance Discrepancies: While IEMG boasts a one-year return of 38.07%, significantly outperforming SPGM's 21.83%, its five-year total return of $1,100 lags behind SPGM's $1,570, indicating higher volatility.
- Holdings Structure Comparison: IEMG focuses exclusively on emerging markets with 2,672 holdings, heavily weighted in technology and financial services at 48%, whereas SPGM offers nearly 3,000 holdings, providing broader global diversification, particularly in blue-chip stocks.
- Risk and Return Trade-off: IEMG's maximum drawdown stands at -37.11%, significantly worse than SPGM's -25.92%, suggesting that while IEMG may offer higher growth potential, it also carries greater risk, making it suitable for investors with a higher risk tolerance.
See More
Microsoft Faces Challenges and Opportunities in AI Business
- Performance Concerns: Microsoft's fiscal Q2 2026 results revealed strong overall performance; however, modest weaknesses in AI software and cloud services led to a more than 10% drop in stock price in one day, raising investor concerns about future growth.
- Copilot License Sales Growth: As of Q2 2026, Microsoft 365's Copilot licenses reached 15 million, doubling year-over-year but representing only a 3.7% market penetration, indicating limited market uptake that could hinder future revenue growth.
- Azure Revenue Growth Slowdown: Azure's revenue grew 39% year-over-year in Q2, surpassing Wall Street's 37.1% forecast, yet slower than the previous quarter's 40%, suggesting a potential loss of momentum that may affect investor confidence.
- Data Center Capacity Shortage: Microsoft's order backlog surged 110% year-over-year to $625 billion, with 45% from OpenAI, which may limit Azure's expansion and increase investment risks due to reliance on external funding and revenue growth.
See More
Microsoft Reports Strong Earnings Amid Stock Decline
- Strong Earnings but Stock Drop: Microsoft reported strong results for its fiscal 2026 second quarter, yet its stock fell over 10% due to modest weakness in AI software and cloud services, now down 22% from its record high, reflecting market concerns about future growth.
- Slow Copilot License Sales: As of the fiscal 2026 second quarter, only 15 million Copilot licenses for Microsoft 365 were sold, doubling year-over-year but representing a mere 3.7% market penetration, indicating insufficient market uptake that could hinder future revenue growth.
- Azure Growth Deceleration: Azure achieved a 39% year-over-year growth rate in the second quarter, exceeding Wall Street's expectations, yet slower than the previous quarter's 40%, with a staggering 110% year-over-year increase in order backlog to $625 billion due to data center capacity shortages, highlighting potential growth bottlenecks.
- Attractive Stock Valuation: With a current P/E ratio of 26.5, Microsoft is at its lowest valuation in three years, significantly lower than the Nasdaq-100's 32.8, and analysts project earnings to rise to $19.06 per share in fiscal 2027, resulting in a forward P/E of just 22.4, suggesting a buying opportunity for long-term investors.
See More
Analysts Downgrade Microsoft and Amazon Ratings Amid AI Competition
- Microsoft Downgrade: Stifel downgraded Microsoft from Buy to Hold, slashing the price target from $540 to $392 due to cloud supply constraints and rising investments, projecting a gross margin drop to about 63% for FY27, indicating increased near-term profitability pressure.
- Amazon Cloud Competitiveness Decline: DA Davidson downgraded Amazon to Neutral with a price target of $175, highlighting AWS's growth lagging behind Microsoft and Google, and suggesting Amazon may need to invest $50 billion to remain competitive in the AI-driven market.
- Tesla Robotaxi Potential: Wolfe Research forecasts Tesla's robotaxi platform could generate $250 billion in annual revenue by 2035, although near-term earnings may face pressure, the long-term ROI remains attractive, driven by autonomous vehicle adoption.
- AMD Long-Term Outlook Positive: Truist Securities advises to “buy the weakness” in AMD, projecting over $20 EPS by 2030 despite a choppy Q4, as strong demand in data center and AI sectors supports its long-term growth narrative.
See More
Amazon AWS Maintains Cloud Leadership Amidst Competition
- Cloud Growth: Amazon's AWS achieved a 24% year-over-year growth in 2025, adding $21.2 billion in revenue, although this was behind Google Cloud's 36% and Microsoft's Azure's 39%, indicating its sustained leadership in the cloud market despite competitive pressures.
- Capital Expenditure Plans: Amazon plans to invest $200 billion in capital expenditures in 2025, primarily for AWS and AI workloads, which has raised skepticism among investors; however, this move underscores the company's commitment to maintaining its market leadership.
- Profitability Comparison: AWS's operating income reached $45.6 billion in 2025, significantly exceeding Google Cloud's $13.9 billion, highlighting Amazon's profitability advantage in the cloud services sector, even as its overall market share declines.
- Cash Flow Situation: Despite generating $139.5 billion in operating cash flow in 2025, the anticipated $200 billion capital expenditure is expected to lead to negative free cash flow in 2026, yet the company continues to execute strongly, with quarterly revenue rising 14% to $213.4 billion.
See More
Software Stocks Decline 30% Amid AI Concerns
- Market Overreaction: Nvidia CEO Jensen Huang argues that the sell-off in software stocks due to the introduction of AI tools is irrational, as these tools are designed to work alongside existing software rather than replace it, indicating a lack of rationality in the market's pessimism towards the software industry.
- Microsoft's Strong Performance: Microsoft has seen a 160% increase in paid users for its generative AI copilots in products like Microsoft 365, and despite a 27% drop from its high, its adjusted earnings grew by 24% in the last quarter, showcasing the company's robust performance in the AI sector.
- AppLovin's Rapid Growth: AppLovin's Axon machine learning engine provides a competitive edge in its ad tech software, and although its stock is down 52%, its earnings surged by 96% in the last quarter, indicating strong potential in the advertising technology space.
- HubSpot's Innovative Leadership: HubSpot has become the first CRM vendor to integrate its platform with three leading generative AI tools, and despite a 73% decline in stock price, its adjusted earnings increased by 22%, demonstrating its ongoing innovation capabilities in customer relationship management.
See More
Comparative Analysis of IEMG and SPGM ETFs
- Identical Expense Ratios: Both IEMG and SPGM feature a competitive expense ratio of 0.09%, appealing to cost-conscious investors looking for low-cost investment options.
- Performance Discrepancies: While IEMG boasts a one-year return of 38.07%, significantly outperforming SPGM's 21.83%, its five-year total return of $1,100 lags behind SPGM's $1,570, indicating higher volatility.
- Holdings Structure Comparison: IEMG focuses exclusively on emerging markets with 2,672 holdings, heavily weighted in technology and financial services at 48%, whereas SPGM offers nearly 3,000 holdings, providing broader global diversification, particularly in blue-chip stocks.
- Risk and Return Trade-off: IEMG's maximum drawdown stands at -37.11%, significantly worse than SPGM's -25.92%, suggesting that while IEMG may offer higher growth potential, it also carries greater risk, making it suitable for investors with a higher risk tolerance.
See More
