The artificial intelligence boom keeps propelling Microsoft to levels not seen before. The software giant rose 4% Tuesday to finish at a record close after a announcing details on a slew of AI-related initiatives, including pricing for its new AI subscription and a partnership offering Meta Platforms ‘ AI model . The uptick puts shares up 44% year to date and at one of its steepest valuations in more than year, at more than 31 times earnings over the next twelve months, according to FactSet. By comparison, the price-to-earnings ratio for the broader S & P 500 sits at nearly 20. Technical indicators also suggest the stock’s in overbought territory and due for a potential reversal, with its 14-day relative strength index last at 70. Even as shares give up much of the gains in recent sessions, Wall Street is getting more bullish on the outlook, with 85% holding a buy or overweight rating. The consensus target implies about 10% upside, with many firms upping those objectives this week. Despite the steep climb in price and valuation, the investing community is standing by Microsoft, viewing pullbacks as opportunities to add to a growth company expected to keep riding this AI wave. “I don’t think it’s hype,” said Nancy Tengler, CIO of Laffer Tengler Investments. “I do think that they’re going to be able to monetize it. Pretty much everyone believes that generative AI is going to be a critical place to be in the coming decades, and I think Microsoft is far ahead of everyone else.” MSFT YTD mountain Share performance in 2023 The stock remains one of the firm’s largest holdings and a member of its best ideas portfolio, although Tengler sold some shares in the last week and during the second quarter. At its steep multiple and price appreciation, she is refraining from buying shares that look “due for a breather.” Like many investors, both Tengler and Independent Solutions Wealth Management’s Paul Meeks, view a pullback as an opportunity for investors to get into a stock to hold for the long run. Meeks called the 5% to 10% range “very strong support.” “Hold on to shares,” said Ken Mahoney of Mahoney Asset Management. “I know the stock has gone parabolic, I know the stock looks like you want to take some profits, but I would say reduce the temptation and continue to let this run until maybe some quarters down the road where they don’t raise guidance and things flatten out.” A growing total addressable market? Microsoft’s climb to all-time highs stemmed from bullish sentiment around Microsoft’s $30 Copilot tool, and the belief that generative AI will dramatically boost revenue and growth. Goldman Sachs analyst Kash Rangan upped his target to $400 on Friday, citing an expanding total addressable market that could hit $135 billion. He projects that Microsoft can recognize 15% to 30% of this opportunity in the 2026 fiscal year. Elsewhere, Citi’s Tyler Radke lifted his objective to $425, updating forward estimates as a result of Copilot. The product should contribute a minimum of $5 billion in incremental revenue to Office 365 even if penetration comes in on the low-end at 5%, he wrote. MSFT 5D mountain Microsoft shares this week Most analysts and investors agree that Copilot represents a big opportunity for Microsoft, but some remain skeptical of how much it will be able to monetize and how many users it can attract. Guggenheim’s John DiFucci called the pricing “surprisingly high” in a Wednesday note to clients, while Meeks referred to the cost as “super aggressive” and likely out of budget for many everyday customers. “I’m definitely bullish on it, I just think that it’s impossible to quantify,” Meeks said. “Their conversion rates may be disappointing to the analysts on the Street that are assuming, essentially, everybody’s doing this.” Earnings next week could offer the next big catalyst for Microsoft. The investor plans to retain a position regardless of the results but warned that shares could selloff if the company fails to significantly boost revenue guidance and growth expectations in the mid-teens range. “If you’re a tech investor like me, it’s like the foundation of the building,” Meeks said. “You’ve got to have it. When it’s cheap, you buy more and when it’s expensive, you trim a piece and always keep a core holding. Microsoft is so well known that any kind of growth investor would have that philosophy.” — CNBC’s Michael Bloom contributed reporting.
