Betting Against the Microsoft Stock Mania: Why This Tech Titan Isn’t Worth the Hype

Stock Market

Once mainly a develop of operating systems for desktop computers, Microsoft (NASDAQ:MSFT) is mainly a cloud-computing and artificial intelligence technology company now. Yet, even Microsoft has its weak points, and Microsoft stock gets a “B” grade and investors may choose to hold their current share position.

Adding some Microsoft shares to your portfolio is fine, but we’re not pushing for it today. The market has partly factored in Microsoft’s anticipated cloud and AI revenue growth. Don’t rely solely on analysts’ high price targets. Be sure to gather all the facts before judging Microsoft.

Microsoft Stocks Jumps on Cloud and AI Strength

Growth in the cloud and AI definitely contributed to Microsoft’s impressive third-quarter fiscal 2024 results. Microsoft CEO Satya Nadella observed that the company’s cloud-computing platform, Azure, “again took share as customers use our platforms and tools to build their own AI solutions.”

The data backs up Nadella’s confident statement, as Microsoft’s Azure revenue grew 31% year over year. That’s higher than Wall Street’s consensus estimate of 28% growth, and it shows improvement over Azure’s already impressive 30% growth in the prior earlier.

These data points help to explain why investors and analysts (who scrambled to raise their share-price targets) cheered Microsoft’s quarterly results. After all, the market likes practically anything and everything involving the cloud and AI nowadays.

However, it’s not cheap to develop these constantly evolving tech-focused business segments. Notably, Microsoft’s quarterly capital expenditures totaled $14 billion “to support demand in our cloud and AI offerings,” according to the company.

Microsoft’s Area of Weakness

You can call it an area of weakness, or “softness” if you want to be polite about it. Either way, Microsoft sales of Xbox hardware are contracting quickly.

A year earlier, in the third quarter of fiscal 2023, Microsoft’s Xbox division hardware revenue declined 30% YOY. Did the situation improve in Q3 of FY2024?

Actually, it got even worse, with Microsoft’s Xbox division hardware sales falling 31% YOY in the third quarter of fiscal 2024. That’s alarming, but sometimes investors and analysts conveniently ignore a company’s weak points when that company is a darling of the market.

Just because analysts didn’t seem to care much about the poor Xbox sales results, this doesn’t mean you should just overlook these results. We encourage you to look at the big picture and weigh all of the relevant facts.

Don’t just consider the data points that support your thesis. In other words, avoid confirmation bias as much as possible, even with a juggernaut like Microsoft.

Microsoft Stock: Be Careful When Sentiment Runs High

Among analysts and investors, the sentiment is extremely positive concerning Microsoft right now. There’s nothing inherently wrong with that. After all, Microsoft’s cloud and AI strength are undeniable.

So, it’s fine to feel generally bullish about Microsoft. Just don’t feel the need to go overboard in your position sizing. When sentiment is overwhelmingly positive, investors might forget that no company is perfect – not even Microsoft.

Hence, Microsoft stock earns a “B” grade and investors might choose to hold their positions. They could also add a few shares to their portfolios, but there’s no need to go overboard.

On the date of publication, Louis Navellier had a long position in MSFT. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.

The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.

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