Microsoft may be in a slump. But here’s why it is wrong to give up now
Things keep lining up against Microsoft , with all roads leading back to the company’s tarnished standing as an artificial intelligence leader and how that could impact the company’s Azure cloud growth. It’s been known for some time that Microsoft’s Copilot AI assistant has been disappointing. At a time when Alphabet ‘s Gemini, OpenAI’s ChatGPT, and Anthropic’s Claude are being celebrated, Microsoft has been roundly criticized. Last week, the cloud and software giant waved the flag, announcing that it is unifying the teams that work on the commercial and consumer versions of its flagship product. In a Monday note cataloging the issues at Microsoft, Melius Research analyst Ben Reitzes said the Copolit reorganization certainly “doesn’t seem like it was into strength.” Reitzes also explained how Microsoft’s strained relationship with OpenAI, which he rightfully called the “most important partner it has ever had,” has contributed to the challenges. “OpenAI, which accounts for 45% of the Azure backlog, was supposed to share IP that would shortcut Microsoft toward AI equilibrium with Google,” according to the Melius analyst. He said that the IP sharing does not seem to be helping Copilot much, which is forcing Microsoft to spend more than previously thought on research and development (R & D) and use Azure computing power to train its own models. Azure capacity has already been strained as a result of immense AI demand. Every bit of compute not used by Microsoft goes to making money from customers. Using more Azure capacity internally leaves less to allocate to customers and the risk of less revenue. Alongside earnings in January, management said Azure customer demand exceeded available supply. As a result, Microsoft’s fiscal 2026 second-quarter year-over-year Azure and other cloud services revenue growth ticked down sequentially to 39% from 40% in the prior quarter. The outlook for the current quarter, which is expected to be reported in about a month, was for 37% growth. Add to all this the hiring freezes and layoffs at the very companies that would be leveraging a better Copilot, and we start to see why Microsoft stock can’t seem to sustain any momentum. Shares are down nearly 21% in 2026. We understand all these concerns. We just don’t think they amount to the obituary that Melius has seemingly written here, and the Club is sticking with the name. MSFT YTD mountain Microsoft YTD Reitzes isn’t wrong when he says that execution on Copilot has been disappointing. Nor is he wrong that the OpenAI partnership has not yielded the expected benefits. Revenue growth and a demonstration of strong monetization on the mountains of cash the company has piled into AI research have certainly not been up to our expectations. That lack of AI monetization tripped up the stock in January when investors wanted more fiscal Q2 revenue growth to justify a 66% year-over-year increase in capital expenditures. While Melius kept its hold rating on Microsoft, just like we have with our 2 rating, Reitzes left little room for optimism in his note. We see more room for optimism. Microsoft is not just any other company going through a tough time. It’s one of the largest and most successful companies in history. More importantly, it has boatloads of cash it can deploy into R & D or a needed acquisition. It also has a strong management team. Sure, this Copilot initiative may not be working out well, but the reorganization announced last week is what we should expect from a great management team. Being great doesn’t mean you never get it wrong; it means that when you do get it wrong, you can acknowledge that there is a problem, identify what it is, and adapt and pivot as necessary. Between the money Microsoft has at its disposal and the longer-term track record of the management team, Azure remains the second biggest cloud in the world, behind Amazon and ahead of Google Cloud. Microsoft also has Windows, which is still the dominant enterprise operating system. We don’t think Microsoft should be counted out at this point. Facing headwinds last year, we exited Alphabet on March 31, 2025, and lived to regret it as the stock proceeded to run, shortly after we left. The Club reentered Alphabet on Dec. 29, 2025. We’re not looking to make the same mistake with Microsoft. GOOGL mountain 2025-01-01 Alphabet since January 2025 To be clear, we are not basing our decision to hold Microsoft on hope, arguing that because we wrongfully booted Alphabet, we must keep Microsoft. These companies, afterall do have very different business models, and came at AI in two very different ways. There is no denying, however, that it colors our thinking. During Monday’s Morning Meeting , Jim Cramer said, “Do you know that it really is the ghost of Alphabet that keeps me from saying, ‘You know what, I’m done, I can’t fight it.’ … You’re not dealing with a company that has no means; it’s an incredibly rich company. You’re not dealing with a company that has bad management; it’s among the best management in the whole S & P.” Jim’s commentary echoes that of Philip Fisher, who in his book “Common Stocks and Uncommon Profits” discussed the concept of companies that are “fortunate because they are able” and those that are “fortunate and able.” The idea is that a “fortunate and able” company was lucky enough to be in the right place at the right time, and had a management team strong enough to take advantage of the opportunity. On the other hand, a “fortunate because they are able” company has the resources and know-how to make its own luck. Sure, it can take advantage of opportunities — but more importantly, through financial means, superior management, and sheer determination, it can create its own opportunities. We believe that Microsoft, like Alphabet, falls into this second category. So, we aren’t looking to Alphabet as a reason to stick with Microsoft just because selling the former was wrong in hindsight, which is always 20/20. Rather, it’s that we acknowledge the mistake with Alphabet was giving up on a “fortunate because they are able” company. Alphabet, too, was left for dead by the Street on fears that management wasn’t executing and the company’s AI strategy wasn’t panning out to the point the were being overtaken by others. Funny enough, at the time, it was Microsoft-backed OpenAI that was one of the others. It goes to show how fast the tables can turn when Wall Street senses weakness. Bottom line We’ve been here before. Remember Alphabet’s Bard? Yeah, neither do most investors, and that’s the point. Those “fortunate because they are able” companies, like Microsoft and Alphabet (and to be fair, this goes for most of the megacaps we own), can survive missteps here and there. Without taking chances and risking missteps, they might not be the companies they are today. Alphabet turned the ship around and was swiftly rewarded; we think it would be crazy to think Microsoft can’t do the same thing. So, at 21 times forward earnings, the lowest valuation in roughly seven years, we simply don’t share the same level of bearishness as Reitzes at Melius. He’s not necessarily wrong; we just think that, as obviously wrong as it has been these past five months to own Microsoft, it is likely to prove equally wrong a year from now, to have sold now. (Jim Cramer’s Charitable Trust is long MSFT, AMZN, GOOGL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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