Where Will Microsoft Be in 1 Year?

Stock prices tend to fluctuate over time, but Microsoft (NASDAQ: MSFT) is working through a doozy of a slump, at least by the tech giant's standards. Shares of Microsoft have dropped more than 25% below their high, the stock's second-worst drawdown in the past 10 years.

A proven, world-class tech giant such as Microsoft doesn't go down easily. The decline signals trouble; Wall Street is sounding an alarm. So, what exactly is going on?

Several factors are simultaneously impacting the stock. Here is what they are, what they mean, and whether Microsoft stock is likely to trade higher or lower a year from now.

Image source: Getty Images.

Why is Microsoft down? Several reasons, actually

For starters, Microsoft is somewhat between a rock and a hard place with artificial intelligence (AI). It has invested and partnered closely with OpenAI, the developer of ChatGPT. Microsoft has come to rely on OpenAI, which currently accounts for $281 billion of Azure's $625 billion cloud computing backlog.

However, OpenAI is struggling to fend off competition, and scrutiny has heated up over its ability to fund spending commitments of over a trillion dollars while its business burns through billions. Microsoft itself plans to spend $120 billion on AI infrastructure this year alone, a potential disaster if OpenAI falters.

Lastly, software has emerged as one of the first industries where AI could really make waves. There has been a widespread sell-off in software stocks, and Microsoft's legacy Windows and productivity software are crucial cash cows. Put it all together, and Microsoft is under more pressure than at any point in recent memory.

How concerned should investors be about Microsoft?

There's no telling how low Microsoft may drop. Instead, investors should try to gauge how likely worst-case scenarios are.

Microsoft has acknowledged that it is developing its own AI models to diversify away from OpenAI. For OpenAI, the company is working to raise $100 billion in new funding to stabilize the business for the next few years. It doesn't seem likely that OpenAI will just collapse. It has also begun punching back against competitors, releasing Frontier to develop AI agents, a new Codex model for writing code, and acquiring OpenClaw, a popular open-source AI agent program.

For Microsoft, investors may underestimate how sticky its software is. For example, the world essentially ground to a halt in July 2024 when a third-party cybersecurity bug caused a global outage among Windows computer systems. It still seems like a massive stretch for companies to rip out such essential software in favor of unproven AI, especially now that Microsoft is integrating AI features across its products.

Investors should look for market angst to fade a bit as these things play out.

Will the stock trade higher or lower one year from now?

As Microsoft's valuation declines, the potential risks decrease and the upside increases. The stock already trades at less than 25 times earnings, near its lowest P/E ratio over the past decade. It doesn't seem like a stretch to believe that Microsoft stock will trade higher in a year than it does now, just as long as the business ultimately proves its fundamentals are intact.

Justin Pope has positions in Microsoft. The Motley Fool has positions in and recommends Microsoft. The Motley Fool has a disclosure policy.