Microsoft Is Having Its Worst Year Since 2022, but This Analyst Says It's a Setup for a $450 Rally

There's no doubt that Microsoft (NASDAQ: MSFT) has been a major disappointment for investors this year. The stock, which was at an all-time high late last year, has fallen 24% from that lofty perch. Now in the red by more than 15% in 2026, Microsoft is on target to have its worst year since 2022.

The major concern for Microsoft is its aggressive capital spending to build out its artificial intelligence infrastructure. The company spent $37.5 billion on capex in the second quarter of fiscal 2026, with much of that funding directed to semiconductor chips, including graphics processing units (GPUs) and central processing units (CPUs). Investors are concerned that companies such as Microsoft are spending billions on chips that have a short lifespan, and that they're sacrificing free cash flow today without a guarantee that they'll be able to recoup their investments down the road.

However, analysts such as Benchmark's Yi Fu Lee have a different take and are projecting big things for Microsoft. Lee says the drop in Microsoft stock presents an "attractive buying opportunity" and has given it a buy rating and a $450 price target. That represents potential upside of 10% in the short term.

Let's take a closer look at Microsoft.

Image source: The Motley Fool.

Why Microsoft has plenty of life

The biggest reason to like Microsoft is its enviable position as a provider of industry-leading software used by millions. The Microsoft 365 suite of products, including Word, Outlook, and PowerPoint, is a must-have product for many -- the company has nearly 345 million paid subscribers, as well as 321 million active users of its software.

The company has also incorporated AI into its offerings through Microsoft Copilot, a conversational AI assistant that automates tasks and summarizes data.

That helped Microsoft's revenue jump 17% in the second quarter of fiscal 2026 (ended Dec. 31, 2025), to $81.3 billion. "We are only at the beginning phases of AI diffusion and already Microsoft has built an AI business that is larger than some of our biggest franchises," CEO Satya Nadella said. "We are pushing the frontier across our entire AI stack to drive new value for our customers and partners."

Microsoft is also one of the biggest cloud computing companies in the world, holding a 21% market share that's second only to Amazon's. The cloud market is continuing to expand as companies look to move more of their operations to cloud environments rather than operate their own costly data centers for AI-powered software. The cloud computing market, which Grand View Research valued at $945.65 billion last year, is expected to reach nearly $3.35 trillion by 2033, for a compound annual growth rate of 16%.

Why Microsoft is still a buy

Microsoft -- as well as other hyperscalers -- is spending heavily right now on building out its AI infrastructure. And while there are some naysayers who are concerned, this is a place where Nadella and Microsoft have been before.

In a recent interview with Morgan Stanley analyst Keith Weiss, Nadella said the concerns about AI spending are similar to those Microsoft faced in 2014 when it was investing in its cloud platform. That gamble has paid off. "We knew there was going to be margin in that area, and we kept building," he said.

Time will tell if Nadella's latest bet will pay off as well, but I'm betting that it will.

Patrick Sanders has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Microsoft. The Motley Fool has a disclosure policy.