Prediction: This Fallen AI Stock Could Be the Comeback Story of 2026
Key Points
Microsoft stock is still down over 20% from its highs.
The stock looks cheap from one valuation metric.
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2026 has been an odd year for artificial intelligence (AI) investors. While some stocks have done well, others have flopped. However, after the recent rally in the markets, several AI stocks are near their all-time highs, but not all. Microsoft (NASDAQ: MSFT) has rallied like its peers, but not to the same level. Microsoft is still down over 20% from its all-time high, but I think it can finish off its comeback story and reach a new high before 2026 is over.
If it can pull it off, Microsoft stock is a must-buy at these levels, as it would easily outperform the market throughout the end of the year.
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Microsoft's stock is still hovering near low valuation levels
Why has Microsoft's stock fallen so much? I don't think anyone in the market can pinpoint that answer. On the surface, everything looks great for Microsoft. During its last quarter, its revenue rose 17% year over year, and its non-GAAP (adjusted) earnings per share (EPS) rose 24% (its GAAP EPS rose 60% because its OpenAI investment is rising). Microsoft Azure, its cloud computing division, was its best-performing segment, rising 39% in the quarter. This division is an important one to watch, as accelerated revenue growth here indicates massive AI spending from its client base.
Microsoft's business is thriving, and I'd expect to see more of the same when Microsoft reports earnings on April 29. But will that be enough to make the stock rally? I think so.
The reality is that Microsoft's stock is among the cheapest levels it has been at in the past decade, even with the recent rally. I prefer to use the operating price-to-earnings (P/E) ratio with Microsoft's stock, as it strips out the effect of investment gains and other one-time charges that can skew the metric.
MSFT Operating PE Ratio data by YCharts
Over the past decade, Microsoft's stock has seldom been this cheap. The most recent example was in 2023, when the market was sure that we were headed straight to a recession. That's obviously a more dire situation than what we're facing now, where Microsoft really doesn't have any problems and is one of the companies that will benefit tremendously from the AI build-out.
As a result, I think Microsoft's rally will continue and could receive a boost following its earnings release. That makes right now the perfect time to take a position in Microsoft's stock, as I think its rally will be rapid once the market realizes stock's value.
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Keithen Drury has positions in Microsoft. The Motley Fool has positions in and recommends Microsoft. The Motley Fool has a disclosure policy.
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