Software Stocks Plunge, Raising Market Concerns
Written by Emily J. Thompson, Senior Investment Analyst
Updated: 1h ago
0mins
Source: Yahoo Finance
- Software Stock Decline: In January 2026, the iShares Expanded Tech-Software Sector ETF fell 16%, with major companies like Microsoft, Palantir, and ServiceNow experiencing significant stock price drops, indicating a loss of market confidence in the software sector.
- AI Disruption Concerns: Despite solid growth reports from these companies, investor fears regarding AI tools potentially replacing traditional enterprise software have intensified, raising doubts about the future of software stocks and affecting investor sentiment.
- Valuation Pressure: ServiceNow's stock has plummeted 50% from its peak in late 2024, yet it still trades at a P/E ratio of 70, indicating that the software sector remains historically expensive, making the current market correction seem reasonable.
- Investment Opportunities: Despite market volatility, analysts recommend focusing on high-quality software stocks like Microsoft, particularly due to the strength of its Azure cloud computing business; although Microsoft's stock is down 23% from its peak last year, it is still considered a worthwhile investment.
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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: 433.500
Low
500.00
Averages
631.36
High
678.00
Current: 433.500
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's Earnings Report Triggers Stock Plunge
- AI Investment Returns: Microsoft has invested a total of $11 billion in OpenAI since 2019, now holding a 27% stake valued at $135 billion; however, despite strong performance in the AI sector, its stock has plummeted following the earnings report.
- Earnings Highlights: In its fiscal second quarter, Microsoft reported a 17% year-over-year revenue increase to $81.3 billion and a 21% rise in operating income to $38.3 billion, achieving an operating margin of 47%, driven by a 39% revenue growth in Azure.
- Market Reaction: Despite beating analyst expectations, investors reacted negatively to the cautious third-quarter revenue guidance of $80.65 billion to $81.75 billion, reflecting only a 15%-17% growth, which led to a significant stock sell-off.
- Future Outlook: Microsoft's remaining performance obligations (RPO) rose to $625 billion, indicating strong future demand; although facing challenges from slowing consumer business growth and declining capital expenditures, it still anticipates mid-to-high teens revenue growth in the coming quarters.
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Microsoft Shares Plunge 10.23% After Earnings Report
- Stock Decline: Microsoft (MSFT) closed at $433.50, down 9.99% on Thursday, primarily due to investor concerns over slowing cloud growth, leading to a significant drop in share price.
- Surge in Trading Volume: Trading volume reached 126.5 million shares, approximately 366% above the three-month average, indicating a strong market reaction to Microsoft's earnings report, despite the company exceeding Wall Street's expectations for sales and EPS in Q2.
- Capital Expenditure Spike: Microsoft's capital expenditures surged 89% year-over-year, raising concerns about ROI as its Intelligent Cloud unit saw a 29% growth in Q2, with the market focusing on the short-lived nature of many investments.
- Valuation Analysis: With a forward P/E ratio of 26, the significant stock sell-off appears extreme given the company's ongoing sales and EPS growth, as management noted that much of the capex was directed towards short-lived assets, prompting investors to seek higher returns.
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