It’s not for certain, but “AI mania” seemed to have peaked in mid-to-late July. Shares in companies with high exposure to the artificial intelligence megatrend, like Microsoft (NASDAQ:MSFT) stock, have fallen back over the past six weeks.
Yet while the market may have calmed down a little with its excitement about this megatrend, I wouldn’t jump to the conclusion that AI will not have any further affect on this tech giant’s performance or valuation.
Sure, the big “payoff moment” for AI may take some time to truly arrive. However, Microsoft’s monetization of this technology continues to gain momentum, as seen from a recent announcement (more below).
Although the near term may be uncertain, prospects remain bright long term. This growth catalyst, plus another catalyst outside of AI, could help to drive the next move higher for this “trillion dollar club” member.
MSFT Stock and Recent Weakness
On July 18, Microsoft hit a new all-time closing high of $358.73 per share. However, like I mentioned above, it was around this time that the stock market’s excitement about all things AI may have hit an all-time high as well, before starting to drop in intensity.
A big reason for this decreased excitement has been the realization that the big profits from generative AI and other types of AI technology are still a few years away from coming to fruition.
That was a key takeaway from Microsoft’s latest earnings release on July 25. While MSFT stock was already pulling back ahead of earnings, this realization applied additional pressure onto shares.
Throughout August, MSFT fell back further because of this factor. At current prices (around $328 per share), the stock is around 8.5% below its high watermark.
Admittedly, this is a fairly modest price decline, but keep in mind that additional volatility may lie ahead.
Analysts and investors keep casting some doubt over the company’s AI catalyst. For instance, analysts at UBS downgraded MSFT on Aug. 29, citing how a limited supply of GPUs could limit how quickly Microsoft can ramp up its AI capabilities.
Two Catalysts Leave Shares Poised to Propel Higher
It may frustrate to be an MSFT stock investor today, but make no mistake. It’s not like shares are doomed to deliver less-than-stellar returns from here. Or worse, experience the sort of “lost decade” this company (and the stock) between 2000 and 2010.
Excitement about the AI megatrend may be cooling, yet it’s not as if it has gone away. While perhaps playing out much slower than originally expected, this catalyst continues to strengthen because monetization efforts continue to accelerate.
A good example is with a recent launch from OpenAI, the AI trailblazer that Microsoft invested heavily into earlier this year.
OpenAI, the developer of ChatGPT, is now launching a business-focused version of the generative AI platform.
Even as some have pointed out that ChatGPT Enterprise could end up competing with some of Microsoft’s AI-powered products, given the profit-sharing and ownership terms of its partnership agreement, the lion’s share of this product’s commercial success will accrue to Microsoft.
Again, alongside further monetization of AI technology, there’s another catalyst that could serve as a booster for MSFT. That would be a rebound in overall tech demand. This too could lead to steady earnings growth in the coming years.
A Greater Positive Impact
Based on sell-side forecasts, Microsoft’s earnings could grow from $10.98 per share this fiscal year (ending June 2024), to nearly $15 per share by fiscal year ending June 2026.
With AI likely to have a greater positive impact on the company’s performance, atop improved earnings from a tech rebound, meeting (or even beating) these forecasts is well within reach.
As I noted previously, some are concerned about the current valuation of MSFT. In their view, an earnings multiple of around 30 is too pricey for a large, mature tech company. Yet if earnings growth comes in line or ahead of forecast, this valuation is sustainable.
This points to shares hitting new highs as the decade plays out.
If you can handle additional moderate near-term volatility, now may be a great time to build/adding to a MSFT stock position.
MSFT stock earns a B rating in Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.