Why Microsoft Stock Just Dropped
Key Points
Stifel analyst Brad Reback just lowered his price target on Microsoft with only a "hold" rating.
Margins are eroding at Azure, as Microsoft overspends on AI investment.
- 10 stocks we like better than Microsoft ›
Microsoft (NASDAQ: MSFT) stock slipped 2.5% through 2:25 p.m. ET Thursday after Stifel analyst Brad Reback lowered his price target on the tech stock this morning, and maintained only a "hold" rating.
Reback thinks Microsoft stock is worth $400 a share -- and it costs less than $357 as of this writing -- but that's still not cheap enough to convince Reback to rate it a "buy."
Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue »
Image source: Microsoft.
Why not buy Microsoft stock?
Why not buy Microsoft at a 12% discount to its real value? Primarily, because Microsoft may disappoint a lot of investors when it reports earnings next month.
Earnings are due out on July 29, and the consensus is that Microsoft will earn a healthy $4.24 per share this quarter -- up 16% year over year. That sure sounds good, but be warned, says Reback. Microsoft's Azure computing business is growing four times as fast as the rest of the business and represents an ever-larger percentage of the company's total business. Again, this sounds good, but gross margins at Azure are compressing as Microsoft spends heavily in the artificial intelligence race.
Reback forecasts that "thanks" to Azure, Microsoft's fiscal 2027 gross margins will decline 4.5 percentage points from last year, to 63%, and miss consensus targets by at least 300 basis points.
What it means for Microsoft stock
More and more revenue coming from a division that's suffering increasingly worse-than-average profit margins? That most certainly does not sound like good news for Microsoft stock.
When viewed in conjunction with what's happening on the cash flow statement, where heavy capital spending on AI has left Microsoft with essentially no free cash flow growth at all for the past two years, and it's hard to make the argument that Microsoft stock is still worth buying.
Should you buy stock in Microsoft right now?
Before you buy stock in Microsoft, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Microsoft wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you’d have $387,428!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $1,221,398!*
Now, it’s worth noting Stock Advisor’s total average return is 895% — a market-crushing outperformance compared to 205% for the S&P 500. Don't miss the latest top 10 list, available with Stock Advisor, and join an investing community built by individual investors for individual investors.
See the 10 stocks »
*Stock Advisor returns as of June 25, 2026.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft. The Motley Fool has a disclosure policy.
Recommended Articles
