If you look at the gains among the Magnificent 7 tech stocks, you might be surprised to see that Microsoft (MSFT) ranks last, up 16%, which underperforms both the S&P 500 (up 23%) and Nasdaq (up 29%).
Or is it not surprising at all?
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Microsoft’s huge spending on artificial intelligence has left many investors worried, raising concern about the timing of returns on these investments.
This year, Microsoft acquired double the number of Nvidia (NVDA) AI chips as its U.S. and Chinese rivals did, the Financial Times reported.
Technology consulting firm Omdia estimates that Microsoft bought 485,000 Nvidia Hopper chips this year, more than twice the figure at Nvidia’s next biggest U.S. customer, Meta, which bought 224,000 Hopper chips.
Microsoft also needs a massive amount of energy.
In September, Microsoft agreed to purchase nuclear power from Constellation Energy (CEG) for 20 years. The deal was Constellation’s biggest ever.
Microsoft will likely spend more on AI in 2025.
Craig T Fruchtman/Getty Images
More AI spending ahead at Microsoft
Nvidia’s GPUs are essential for Microsoft’s AI ambitions. They power the integration of generative-AI models like OpenAI’s GPT into Azure, Microsoft 365 Copilot, and Bing, enabling Microsoft to scale AI services and compete with Amazon’s AWS and Google Cloud.
In October, Microsoft reported a stronger-than-expected fiscal first quarter. Earnings per share were $3.30 versus the $3.10 analysts expected, and revenue of $65.59 billion beat Wall Street’s $64.51 billion consensus forecast.
Despite the results, the company issued a lower-than-expected revenue forecast for the current quarter.
Related: Analysts revamp stock price targets for Microsoft’s AI-power supplier
Microsoft forecast revenue of $68.1 billion to $69.1 billion for the current quarter, short of analysts’ estimate of $69.83 billion.
Capital expenditures for the latest reported quarter reached $20 billion, nearly double the $11.2 billion reported in the year-earlier quarter.
That number will likely grow into 2025.
“We expect capital expenditures to increase on a sequential basis given our cloud and AI demand signals,” said Microsoft Chief Financial Officer Amy Hood during the earnings call.
AI-chip demand may be cooling: Microsoft CEO
Microsoft CEO Satya Nadella recently told Business Insider that the company is “not chip-supply constrained.”
“We were definitely constrained in ’24,” he added. What we have told [Wall Street] is that’s why we are optimistic about the first half of ’25, which is the rest of our fiscal year. And then after that I think we’ll be in better shape going into 2026 and so we have good line of sight.”
Nadella’s comments suggested a shifting supply-and-demand dynamic for Nvidia’s AI chips.
While Nvidia remains dominant in the AI-chip market, tech hyperscalers are increasing the use of their own chips to reduce reliance on Nvidia.
Google (GOOGL) and Meta (META) each deployed about 1.5 million custom chips in 2024. Amazon (AMZN) installed around 1.3 million of its Trainium and Inferentia chips for cloud customers, according to the Financial Times.
But Microsoft is still in the early stages of developing its AI accelerator, deploying 200,000 of its Maia chips this year.
Analysts raise Microsoft stock price targets
Stifel raised its price target on Microsoft shares to $515 from $475 with a buy rating, thefly.com reported.
According to the investment firm, after a rocky start to 2024 the enterprise software sector is closing the year on a stronger note.
The analyst attributed the improvement to multiple factors like modestly accelerating revenue growth, attractive midyear valuation multiples, early signs of AI monetization, declining interest rates, solid economic performance, and Microsoft’s “safe haven” status following the election, given its minimal exposure to tariffs or China-related risks.
Looking to 2025, Stifel expects management teams to adopt a more conservative approach in their Q1 guidance. But the firm expects MSFT’s overall revenue growth rates to at least match those observed in the latter half of 2024.
Related: Analysts reboot Meta stock price targets for 2025
UBS also raised its Microsoft price target, to $525 from $500, and affimed a buy rating.
The firm highlights that Azure’s growth acceleration is likely to be more back-end loaded as new capacity becomes available in the second half of the year, according to a research note.
Although the CEO’s reference to an “AI winter” is unsettling, UBS remains confident of Microsoft’s position at the top tier of the customer and workload spectrum.
More AI Stocks:
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The investment firm also notes that there is no significant evidence of overbuilding among smaller GPU cloud providers.
While sentiment around Microsoft is modestly improving, it remains mixed, UBS says. It attributes this to concern about delays in Azure’s supply-driven acceleration, uncertainty around the timing of capacity launches, elevated capital expenditures, and questions surrounding the evolution of its partnership with OpenAI.
Microsoft shares closed at $437.39, off 3.8%, on Dec 18.
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