Key Points
Microsoft (NASDAQ: MSFT) hasn’t been the investment many hoped it would be in 2026. As of this writing, the stock is up by around 2% year to date. However, many investors also opened positions in the stock during the depths of its sell-off in April and June, when it sank by as much as 27%. Investors who bought Microsoft shares then are up more than 30% on their investments and may be quite satisfied.
To pull Microsoft from the depths of those troughs took a major rally, but will that rebound stop short of lifting Microsoft to heights that allow it to outperform the broader market this year?
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Image source: Getty Images.
Microsoft has an average valuation for a tech stock
Microsoft has its hands in all parts of the tech ecosystem. It has a host of popular software titles that businesses and consumers interact with daily, alongside a thriving cloud computing business and several AI bets. The investment thesis for Microsoft’s future revolves primarily around AI and cloud computing, and it is seeing solid results on those fronts.
During Microsoft’s latest quarter, its AI assistant, Copilot, reached 30 million paid seats, underscoring its growing role in many companies’ AI strategies. Additionally, Azure, its cloud computing platform, surpassed $100 billion in revenue for the fiscal year, accounting for about a third of Microsoft’s top line. Furthermore, this division experienced 43% revenue growth, indicating that the hundreds of billions of dollars that Microsoft has been investing in new AI data centers are paying off. Revenue rose at an 18% pace companywide during Q4 of its fiscal 2026 (which ended June 30). That growth rate is about as good as any Microsoft investor could ask for.
So, why is the stock flat for 2026? It all has to do with Microsoft’s valuation.
Microsoft wasn’t the cheapest stock heading into the year, and the sell-off in the early months of 2026 was due to it not living up to high expectations. Even now, Microsoft trades at 25 times forward earnings, which is pretty much where I’d expect a big tech company to trade.
MSFT PE Ratio (Forward) data by YCharts.
I think that’s a pretty reasonable price to pay for an AI hyperscaler like Microsoft in today’s market, although a rally to something like 30 times forward earnings wouldn’t be unreasonable either.
The reality is that Microsoft is fairly priced now. The time to buy was a few months ago, when it was changing hands at a discounted P/E ratio. I do think Microsoft will likely outperform the market over the next year due to the company’s faster-than-average growth (more than 10%), but the potential for huge returns in the near term has come and gone.
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Keithen Drury has positions in Microsoft. The Motley Fool has positions in and recommends Microsoft. The Motley Fool has a disclosure policy.
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