With year-to-date (YTD) gains of just about 15%, Microsoft (MSFT) is underperforming both the broad-based S&P 500 Index ($SPX) and the tech-heavy Nasdaq Composite Index ($NASX). The Satya Nadella-led company underperformed last year as well, and its gains of 12% in 2024 paled in comparison to its tech peers as well as the broader markets.

Incidentally, the “Magnificent 7,” which led the market rally from the front in 2023 and 2024, did not have the best of years, and none of them made it to the list of top 20 gainers in the S&P 500 Index in 2025. The group’s collective price action has been below par, and only Alphabet (GOOG) (GOOGL) and Nvidia (NVDA) are outperforming their average S&P 500 Index peer by a noticeable margin. Meanwhile, after the 2025 underperformance, Dan Ives of Wedbush Securities—a known perma tech bull—sees MSFT stock rising to $625 next year and termed it a “compelling buy.” Notably, while tech stocks aren’t really known for their dividends and many don’t pay one in the first place, Microsoft’s dividend yield of 0.75% is the highest among Magnificent 7 stocks. It is on the verge of becoming a Dividend Aristocrat.

Why Did Microsoft Underperform in 2025?

Microsoft’s 2025 underperformance has largely been due to concerns over its burgeoning artificial intelligence (AI) capex. The company, which previously said that its capex growth would fall in the fiscal year 2026, now sees it going up instead. The Windows parent splurged almost $35 billion towards capex in the first quarter of its fiscal year 2026, which ended in September, a record for the company.

To be sure, rising AI capex is not a Microsoft thing, and Amazon (AMZN), Meta Platforms (META), and Alphabet have also bumped up spending amid the AI arms race. Barring Alphabet, which entered 2025 with tepid expectations and ended up impressing with its financial performance, the other three are underperforming this year. I find an Alphabet connection to Microsoft’s underperformance. While Gemini gaining ground at OpenAI’s cost helped propel GOOG stock higher, it put pressure on Microsoft, which is OpenAI’s biggest investor and a proxy play on the world’s most valuable unlisted startup.

Microsoft Stock’s 2026 Forecast

Despite the 2025 underperformance, the analyst community is not giving up on Microsoft, and it has a consensus rating of “Strong Buy” from the 48 analysts polled by Barchart. MSFT stock trades even below the Street-low target price of $490, while the mean target price of $629.23 is almost 30% higher than current price levels.

Notably, Ives’ target price of $625 is similar to the consensus price target and the same as Wolfe Research, which lowered MSFT’s target price by $50 earlier this month. Looking at the recent action, DA Davidson and Jefferies maintained their bullish bets on Microsoft this month while maintaining their respective target prices of $675 and $650.

Is MSFT Stock a Buy for 2026?

I remain constructive on MSFT stock heading into 2026. The stock trades at a forward price-to-earnings (P/E) multiple of 30.6x, which I find balanced. The P/E-to-growth (PEG) multiples do look a bit ugly at 1.82x, but that’s got to do with AI capex hitting the company’s profits in the form of higher capex. “Big Short” Michael Burry’s controversial views on tech companies’ inflating the useful life of AI chips notwithstanding, companies like Microsoft are set to face higher depreciation expenses over the next couple of years.

There is a lot to like about Microsoft at these levels, though. The stock is a defensive play with a well-diversified business. The company’s Windows and Office business would continue to benefit from the uptick in PC sales, led by an aging base of installed devices and the advent of AI PCs. The ending of Windows 10 support would also help keep that segment buoyed, as more users would feel urged to upgrade to Windows 11.

Moreover, AI is fueling demand for subscriptions, which would add to Microsoft’s topline. The cloud business is particularly growing at a brisk pace, and Microsoft is closing the gap with market leader Amazon. Specifically, during their recent earnings call, Microsoft said that its commercial cloud remaining performance obligations (RPO) soared 50% to $400 billion at the end of September, with a weighted average duration of just two years.

Overall, while I haven’t been a permabull on MSFT, I have used the dips to add to my positions, something I repeated this time around as well. At these levels, I find MSFT stock a decent buy and see it delivering double-digit returns next year.

On the date of publication,

here.