Microsoft‘s (NASDAQ: MSFT) stock has underperformed (in 2026, its share price has fallen more than 10%). Because it’s a software company, investors aren’t interested in it.
Looking at the stock today however, I see similarities to Alphabet (NASDAQ: GOOG) (Google) back in mid-2025 when it was out of favour and trading near $150 (it has since soared to near $400). Here’s why I think Microsoft could be set to surge at some point just like Alphabet has.
Examining Alphabet’s rebound
In mid-2025, a lot of investors were completely writing Alphabet off. The theory was that ChatGPT was going to disrupt Google search and destroy Alphabet’s business model.
Alphabet didn’t sit around doing nothing as people started to use ChatGPT for search. Instead, it used its financial resources and tech expertise to build an AI product equally as good (Gemini), and then integrated it into its ecosystem, winning back market share.
Additionally, it worked on developing its own powerful AI chips, tensor processing units (TPUs). It’s now selling these to other tech companies, meaning that it has a whole new revenue stream.
Ultimately, it was able to adapt to the changing business landscape and continue thriving (its latest earnings showed revenue growth of 19% at constant currency). As a result, its share price has rebounded, soaring to new all-time highs.
Could Microsoft do the same thing?
Now, I reckon Microsoft is capable of a similar turnaround. Today, it’s out of favour because people are expecting its software sales to fall due to AI disruption and automation. This is a risk. But here’s the thing – Microsoft’s finding new ways to generate revenue.
For example, in its recent earnings it told investors that its AI-powered digital assistant service Copilot now has 20m paid enterprise seats. This service costs around £15 a month per user, so that’s a fair bit of revenue.
Meanwhile, like Alphabet, Microsoft’s also developing its own chips. Earlier this year, it announced the launch of Maia 200 – an inference chip designed to improve the economics of AI token generation.
These chips are not being sold to other companies today. But if the company was to sell them to other businesses, there could be a whole new source of revenue.
Ultimately, there are many ways that Microsoft could reinvent itself for the AI era. I expect it to do just that – this is a company with a history of evolution.
The stock’s cheap today
Zooming in on the valuation, Microsoft looks quite cheap. Looking at the earnings forecast for the year starting 1 July, the forward-looking price-to-earnings (P/E) ratio’s only 21. At that multiple, I see the potential for an upward valuation rerating if the company can show that it’s having success in the AI era. In the past, it has often traded on P/E ratios in the 30s.
Of course, there are no guarantees the stock will perform well from here. AI automation is a risk and sentiment towards the stock could remain weak.
At current levels however, I like the risk/reward set-up and believe the stock’s worth considering. It’s worth noting that the average analyst price target is $564 – about 35% above the current share price.
