The actions of the Microsoft (Msft 0.35%)) fell by 6% immediately after its financial profit report in the second quarter on January 29. The software leader has generated income and profits that have exceeded Wall Street’s expectations, but investors were not enough to justify the offer of the course of action to new summits.
The main problem seems to be the evaluation. Microsoft has accelerated its capital expenses in recent years to support artificial intelligence initiatives (AI). Investors have submitted to the price of action up to a high price for the multiple profits (P / E) of 33 providing that these expenses stimulate strong growth, but the profits of the company have only increased by 10% from one year to the next in the last three quarters.
Investors can start losing patience while waiting for these investments to bear fruit. Here is why the action could continue to disappoint investors in 2025.
Higher capital expenses do not result in higher growth
To his credit, Microsoft is in a solid competitive position to benefit from the investment of companies in AI services. Microsoft’s cloud revenues exceeded $ 40 billion and increased by 21% from one year to the next. IA -related income measures up to $ 13 billion on an annualized basis and increased by 175% from one year to the next.
However, AI’s revenues barely move the needle for a company generating $ 261 billion in total income on all products. In addition, as its rate of growth in relatively low profits indicates, this small amount of additional IA income has a high cost.
Data by Ycharts.
Microsoft has doubled its data center capacity in the past three years. Capital spending during the 2022 calendar was less than $ 25 billion, but more than doubled at $ 55 billion in the past 12 months.
Despite this accelerated expenditure curve, profits growth from one year to the other of Microsoft has increased from more than 20% a year to only 10%, and this deceleration of profits increased while the Investors pay a higher multiple P / E for shares. Even given the long -term estimates, analysts expect the profits to increase at an annualized rate of 13%, which may not be sufficient to support the 33 p / e of the action.
It is understandable that higher expenses put pressure on the margins and short -term gains. But even Microsoft’s income growth has not shown no acceleration in the past five years. The increase of 12% of Microsoft’s annual sliding of 12% in annual sliding complies with its historic average.
This raises questions on the question of whether Microsoft wins capital returns to justify these massive expenses increases technological infrastructure.
The stock is relatively expensive and could drop more
To be fair, Microsoft is investing to meet the demand for AI and long -term cloud services. But that does not purchase the action, especially when there are other major technological companies that invest in AI, but also indicate much higher profits.
For example, Meta-platforms Profits growth in the fourth quarter has declared 50% from one year to the next, and analysts also predict that its profits increase by 17% per year in the coming years. Meta increases income faster than Microsoft, while the action assessment is slightly cheaper. Investors can buy shares for 29 times the profits.
Microsoft certainly notes a solid demand for AI, but AI services do not generate enough income to have an impact on the overall growth rate of the company. Unless Microsoft can accelerate income or growth in profits, IThe nvestors should not expect the stock to reach new peaks anytime soon, and there could even be more drawbacks if the stock is corrected at a lower P / E.
Randi Zuckerberg, former Director of Development of the Facebook and Sister of the CEO of Meta Platforms, Mark Zuckerberg, is a member of the board of directors of Motley Fool’s. John Ballard has no position in the actions mentioned. The Motley Fool has positions and recommends Meta and Microsoft platforms. The Motley Fool recommends the following options: Long January 2026 Calls $ 395 on Microsoft and Court January 2026 405 $ calls Microsoft. The Motley Fool has a policy of disclosure.
