Microsoft is experiencing its deepest drawdown of the past three years, with a current pullback of 28%. However, this is not a sign of weakness but rather a temporary reaction to the company’s aggressive investment in AI infrastructure. The stock has rarely pulled back more than 20%, and recoveries have been swift.
The main cause of the current drawdown is Microsoft’s projected $190 billion in capital expenditures for 2026, which includes a significant headwind due to component-price increases. However, this number should not be conflated with structural deterioration. The company is investing in its existing backlog, which will generate returns over many years.
Microsoft’s valuation multiple has compressed significantly, but this is largely driven by depreciation on assets that will generate returns. The stock’s P/E ratio currently sits at around 20.5x, which is lower than its long-term historical mean. Revenue growth and Azure capacity constraints have not impacted demand, and the company’s commercial backlog has grown 99% in a single year.
TIKR’s valuation model targets Microsoft at $775 in the mid-case scenario, representing an annualized return of around 19%. The model assumes revenue growing around 16% annually and net income margins expanding toward 39%.
For investors with a multi-year time horizon, the gap between what this business is doing and what the market is paying for it deserves serious attention. Microsoft is not a turnaround story or speculative bet but rather one of the most consistently profitable businesses ever built.
Source: https://www.tikr.com/blog/microsoft-is-cheaper-than-its-been-in-nearly-a-decade-the-market-is-focused-on-the-wrong-thing