So far this year, Microsoft (NASDAQ:MSFT) has beaten its big tech rivals, when it comes to capitalizing on the rise of artificial intelligence (or A.I.). However, while this did spark a big rally for MSFT stock in late January/early February, this factor is now not enough to keep shares moving in the right direction.
Near-term worries are coming back into focus. It will be many years before A.I. starts to have a material impact on the company’s bottom line.
In the meantime, the current economic slowdown, in particular the tech sector slowdown, will play a much greater role in Microsoft’s overall operating performance during 2023.
That said, if you’ve yet to enter a position in this A.I. frontrunner, this may not be a negative. In fact, it may work to your advantage if this dynamic pushes shares lower in the coming months.
Why ‘A.I. Mania’ Is No Longer Helping MSFT Stock
Microsoft may not have been the biggest beneficiary in terms of price appreciation from the “A.I. Mania” that swept Wall Street last month, but this mega-cap tech stock did deliver an outsized performance until it peaked a few weeks ago.
This trend, along with the company’s successful integration of OpenAI’s generative A.I. technology into its Bing search platform, resulted in a nearly 15% spike in price for MSFT stock. However, this A.I. catalyst is no longer sending shares to elevated prices.
Instead, as I mentioned above, near-term worries are again top of mind. As you likely know, MSFT, like other major tech stocks, tanked throughout 2022. This at first was the result of an anticipated slowdown in demand for tech products/services. Then it was due to rising worries the slowdown would last longer than expected.
Such worries have returned to the market. With Federal Reserve officials concerned that inflation will ease slowly, a “Fed pivot” on interest rates during 2023 now appears unlikely. High inflation, higher rates, and a further slowdown in economic growth bode badly for Microsoft’s operating performance this and subsequent quarters.
En Route to the Buy Zone?
Sure, renewed near-term worries have only partially pushed MSFT stock back to pre-A.I. boost prices. As of this writing, the stock is trading for around $250 per share. However, MSFT could suffer a further rout over the next few months.
Analysts have already trimmed their quarterly earnings forecasts. Considering management’s recent admissions about slowing growth, it’s possible that results for the remainder of this fiscal year (ending June 2023) end up falling short of expectations.
Microsoft holds its next quarterly earnings release on April 27. Further weakness in PCs and cloud computing may mean more declines for MSFT. Possibly sending it back down to the buy zone, which I believe is at or below $225 per share.
I know what you are thinking: what difference does it make waiting for shares to hit $225 per share? However, hear me out. Although it may seem like I’m splitting hairs, at this slightly lower price level, risk/reward could be significantly more favorable.
If MSFT drops to $225 per share, it will at that price trade for around 24.2 times forward earnings (based on FY23 forecasts). In recent years, a forward price-to-earnings (or P/E) ratio in the 20-25 range has been the floor for Microsoft’s valuation.
The A.I. catalyst, while noteworthy, will take time to really move the needle. Still, as Microsoft integrates A.I. features into not just Bing, but its Azure cloud platform as well, the company’s earnings growth could re-accelerate as the tech slowdown ends in 2024 and 2025.
Achieving this may enable the stock to re-hit its all-time high ($339.03 per share) within two years. While that represents an upside potential of around 35% at today’s prices. At $225 per share, that would mean a more than 50% gain.
While trending lower now, if MSFT stock falls to $225 per share, pounce on it.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.