Microsoft: From Worst to Potential Best in Big Tech

Microsoft Corp. (MSFT) has recently seen itself labeled as the worst-performing stock among Big Tech companies, a category often defined by colossal players like Meta, Google, and Amazon. However, analyst Gil Luria from D.A. Davidson believes that Microsoft could emerge as a diamond in the rough, despite its current position. On Thursday, Luria upgraded Microsoft’s stock rating from neutral to buy, raising his price target for the stock from $425 to an impressive $450. This optimistic outlook is rooted in Microsoft’s newfound discipline around artificial intelligence (AI) spending and its capacity to tackle any consumer spending slowdown more effectively than its peers.

Current Market Performance and Comparisons

In the comparative landscape of technology stocks, Microsoft stands out—or rather, lags behind—as the sole member of what Luria calls the ‘Magnificent Six’ to experience a downturn over the past year. This collection includes heavyweights like Amazon, Meta, and Alphabet, which have maintained upward momentum throughout the same period. The trend continued with Luria’s downgrade of Microsoft six months ago—indicating that the company has consistently struggled.

According to Luria, the recent dip in Microsoft’s share price can largely be attributed to heightened capital spending growth in the past. However, he notes a crucial shift in the company’s strategy: Microsoft has recently signaled its intent to hold capital spending flat for the next couple of quarters with plans of more conservative growth projections leading into fiscal 2026. “Chief Executive Satya Nadella has signaled the end of the escalation,” Luria reported, emphasizing a shift from investment-heavy practices to more frugal strategies.

Strategic Changes in Capital Spending

One significant change coming to Microsoft’s capital spending is its evolving approach to data center capacity. In a recent interview on the “Dwarkesh Podcast,” Nadella alluded to plans for leasing data center capacity in 2027 and 2028, pivoting away from constructing new facilities while still meeting demand. This is a noteworthy indicator that Microsoft is adjusting its operations to reduce overhead and potentially improve profitability.

Insights from regulatory filings further emphasize this adjustment. CoreWeave, a cloud-services provider looking to go public, disclosed that Microsoft accounted for a remarkable 62% of its revenue. Luria pointed out that CoreWeave’s success is significantly tied to their partnership with Microsoft, which seems to illustrate a potential project pipeline between the companies.

AI and Microsoft’s Future Prospects

Another factor contributing to Microsoft’s solid positioning involves its partnership with OpenAI, especially concerning the Stargate project. Luria highlighted how OpenAI’s requirements for data training capacity are evolving, which aligns with Microsoft’s strategic retreat from training workloads while still securing exclusivity for OpenAI’s valuable ChatGPT inference workloads. This could potentially bolster Microsoft’s revenue without exposing it to the unpredictable nature of training workloads that may lead to volatility.

Consumer Spending Slowdown: A Protective Position

Beyond capital discipline, Luria believes Microsoft is also better suited to weather any potential consumer spending slowdown than many of its competitors. “While the extent of the consumer slowdown may still be unclear, we believe some slowdown is more likely than not,” Luria stated, suggesting that Microsoft’s unique business model, with its more significant focus on enterprise services compared to its peers, provides it a cushion. Given this positioning, Microsoft’s earnings are considered less susceptible to cuts that might hit other megacap stocks.

Conclusion: A Rebound on the Horizon?

In conclusion, while Microsoft has faced challenges in recent times, analysts like Gil Luria express renewed optimism about the company’s future. With a more disciplined approach to capital spending and a business model designed to ride out fluctuations in consumer spending, Microsoft is setting the stage for a potential turnaround. As the tech landscape continues to evolve, investors will be watching closely to see if Microsoft’s strategic pivots indeed lead to its emergence as a top performer among Big Tech stocks.