Has Microsoft's Stock Hit a Peak?

Microsoft (NASDAQ: MSFT) is one of the most valuable companies in the world, with a market cap of around $3 trillion. But lately, the stock's progress has stalled. In the past six months, its share price has fallen by 3%, and its year-to-date gains of 10% trail the S&P 500 , which is up by 20%).

The tech giant has benefited from its timely investments in artificial intelligence (AI), and it has bolstered its products and services with new AI capabilities. But while the business is doing well, it may not be performing at a high enough level to attract more growth investors , given the stock's already-expensive valuation.

Has Microsoft's stock hit a peak, or is it overdue for a rally?

Analysts see a 20% upside for the stock

If you believe Wall Street analysts, you might be bullish on Microsoft stock in the short run. Their price targets typically look at where they think a stock will go in the next 12 months or so. And based on their average price target of just under $494, Microsoft's stock could over the next year rise by 20% from where it trades right now.

But those price targets also cover a fairly wide range, and analysts' predictions do change. If the company's results in upcoming quarters prove to be underwhelming, that could lead to downgrades and price target cuts; if results exceed expectations, the opposite may occur. Thus, the consensus analyst price target for a stock is effectively a moving target.

Why Microsoft could be due for some downgrades

Microsoft is a good stock to own in the long run. Given its diversified businesses from gaming to networking to cloud computing to business software, it's unlikely to run out of growth opportunities. But investors may still be pricing a bit too much optimism into the stock these days. Currently, Microsoft trades at a price-to-earnings multiple of 35, which is higher than what it has averaged over the past five years.

MSFT PE Ratio data by YCharts.

There are, for example, rumblings that the company's AI assistant, Copilot, isn't exactly winning over customers . Just how much of a boost Microsoft is getting from AI should be made clearer by the company's upcoming quarterly numbers.

In the company's last reported quarter, which ended on July 30, revenue rose by 15% to $64.7 billion. That was a higher growth rate than the 8% it achieved a year earlier, but whether it's high enough to warrant an earnings multiple of 35 is the big question for investors today.

What may create a further challenge to the stock in the near term is that Microsoft's ongoing heavy investments in AI are eating into its bottom line. Last quarter, for instance, the company's profits rose by just 10% year over year whereas a year earlier, they improved by 20%. So while its top-line growth accelerated, it wasn't the same story further down the income statement.

If Microsoft doesn't demonstrate both strong top- and bottom-line growth in its fiscal 2025 Q1 report (which comes out later this month), bearishness could increase, and analysts could downgrade the stock and cut their price targets in the weeks and months ahead.

Should you buy Microsoft stock today?

Microsoft does look like it has hit a peak, at least in the near term. For the tech stock to rise a whole lot higher, investors would likely have to be willing to pay close to 40 times earnings for it, and I don't think its results and visible outlook are strong enough to justify that today.

If you're looking to hold onto Microsoft stock for five years or more, then by all means, buy it now. It's still a great long-term investment. But given that it trades at a fairly high premium these days, you shouldn't be surprised if there's some weakness ahead for the stock -- it could experience a correction in the near future.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy .