Analysis of Ongoing Decline in Software Stocks
Written by Emily J. Thompson, Senior Investment Analyst
Updated: Jan 31 2026
0mins
Should l Buy MSFT?
Source: Fool
- Market Trend Analysis: Earnings reports from Meta, Microsoft, and ServiceNow indicate that despite some positive performances, overall market confidence in software stocks continues to decline, leading to sell-offs in companies like Salesforce and Rubrik.
- Earnings Impact: While Meta and Microsoft's earnings had highlights, they failed to effectively boost market sentiment, exacerbating investor concerns about future growth in the software sector and impacting overall industry valuations.
- Investor Reaction: The ongoing sell-off in software stocks reflects investor worries about economic slowdown and intensified industry competition, resulting in greater downward pressure on related stocks in the short term.
- Industry Outlook: As confidence in software stocks wanes, investors may reassess their portfolios, shifting towards more defensive assets to navigate potential economic uncertainties.
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Analyst Views on MSFT
Wall Street analysts forecast MSFT stock price to rise over the next 12 months. According to Wall Street analysts, the average 1-year price target for MSFT is 631.36 USD with a low forecast of 500.00 USD and a high forecast of 678.00 USD. However, analyst price targets are subjective and often lag stock prices, so investors should focus on the objective reasons behind analyst rating changes, which better reflect the company's fundamentals.
34 Analyst Rating
32 Buy
2 Hold
0 Sell
Strong Buy
Current: 393.670
Low
500.00
Averages
631.36
High
678.00
Current: 393.670
Low
500.00
Averages
631.36
High
678.00
About MSFT
Microsoft Corporation is a technology company that develops and supports software, services, devices, and solutions. Its Productivity and Business Processes segment consists of products and services in its portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. It comprises Microsoft 365 Commercial products and cloud services; Microsoft 365 Consumer products and cloud services; LinkedIn, and Dynamics products and cloud services. The Intelligent Cloud segment consists of its public, private, and hybrid server products and cloud services. It comprises server products and cloud services, including Azure, and enterprise and partner services, including Enterprise Support Services. Its More Personal Computing segment primarily comprises Windows and Devices, including Windows OEM licensing; Gaming, including Xbox hardware and Xbox content; Search and news advertising, comprising Bing and Copilot, Microsoft News, and Microsoft Edge.
About the author
Emily J. Thompson
Emily J. Thompson, a Chartered Financial Analyst (CFA) with 12 years in investment research, graduated with honors from the Wharton School. Specializing in industrial and technology stocks, she provides in-depth analysis for Intellectia’s earnings and market brief reports.
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See More
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- Performance Concerns: Microsoft's fiscal Q2 2026 results revealed strong overall performance; however, modest weaknesses in AI software and cloud services led to a more than 10% drop in stock price in one day, raising investor concerns about future growth.
- Copilot License Sales Growth: As of Q2 2026, Microsoft 365's Copilot licenses reached 15 million, doubling year-over-year but representing only a 3.7% market penetration, indicating limited market uptake that could hinder future revenue growth.
- Azure Revenue Growth Slowdown: Azure's revenue grew 39% year-over-year in Q2, surpassing Wall Street's 37.1% forecast, yet slower than the previous quarter's 40%, suggesting a potential loss of momentum that may affect investor confidence.
- Data Center Capacity Shortage: Microsoft's order backlog surged 110% year-over-year to $625 billion, with 45% from OpenAI, which may limit Azure's expansion and increase investment risks due to reliance on external funding and revenue growth.
See More
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- Strong Earnings but Stock Drop: Microsoft reported strong results for its fiscal 2026 second quarter, yet its stock fell over 10% due to modest weakness in AI software and cloud services, now down 22% from its record high, reflecting market concerns about future growth.
- Slow Copilot License Sales: As of the fiscal 2026 second quarter, only 15 million Copilot licenses for Microsoft 365 were sold, doubling year-over-year but representing a mere 3.7% market penetration, indicating insufficient market uptake that could hinder future revenue growth.
- Azure Growth Deceleration: Azure achieved a 39% year-over-year growth rate in the second quarter, exceeding Wall Street's expectations, yet slower than the previous quarter's 40%, with a staggering 110% year-over-year increase in order backlog to $625 billion due to data center capacity shortages, highlighting potential growth bottlenecks.
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See More
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- Competitive Landscape Shift: Since the launch of the Gemini 3 model in November, Google has secured a cloud partnership with Apple, leveraging its AI capabilities to drive business growth, while Amazon faces competitive disadvantages due to its lack of in-house AI operations.
- Investor Sentiment Fluctuations: Despite Amazon and Microsoft's cloud units also beating expectations, the size of their beats failed to impress investors, leading to post-earnings selloffs, with DA Davidson downgrading Amazon to 'Neutral'.
- Increased Capital Expenditures: Google plans to double its capital expenditures this year, marking the largest increase among Big Tech peers, and while its stock has rallied about 65% over the past six months, analysts remain cautious about its future upside potential.
See More
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- Hardware Companies Surge: Companies like Nvidia, Broadcom, and Taiwan Semiconductor are profiting from AI demand, with Nvidia's GPUs being the preferred choice for AI workloads; AI spending is projected to reach $3 trillion to $4 trillion by 2030, indicating significant market potential.
- Cloud Computing Market Expansion: Major cloud providers such as Amazon, Google, and Microsoft are heavily investing in data centers to meet the demand for computing power from AI developers, with Microsoft Azure achieving a growth rate of 39% in Q2 FY 2026, showcasing its competitive edge in the market.
- Recurring Revenue Stream: The rental model of cloud computing provides these companies with a continuous revenue stream; while they need to regularly replace computing units, the initial investment in infrastructure is already covered, leading to a substantial increase in future profitability.
- Intensifying Market Competition: As AI hardware and cloud computing rapidly evolve, competition among related companies will intensify, prompting investors to monitor these firms' performance in technological innovation and market share.
See More
AI Computing Hardware Demand Expected to Surge Through 2030
- Market Demand Growth: AI computing hardware demand is expected to surge through 2030, with cloud computing companies being key drivers, indicating that AI remains a leading investment theme attracting significant capital inflows.
- Hardware Investment Opportunities: Companies like Nvidia, Broadcom, and Taiwan Semiconductor are excelling in the AI hardware space, with Nvidia's GPUs widely used for AI workloads, known for their high performance despite higher costs, while Broadcom's ASIC designs offer more cost-effective solutions, with AI semiconductor revenue expected to double by Q1 2026.
- Cloud Computing Infrastructure: Amazon, Google, and Microsoft are the major cloud providers, with Microsoft Azure achieving a 39% growth rate in Q2 FY 2026; although AWS is growing slower, all three are actively investing in data centers to meet rising demand, ensuring a continuous revenue stream.
- Long-Term Investment Potential: With AI spending projected to reach $3 trillion to $4 trillion by 2030, the combination of cloud computing and AI hardware presents enormous long-term return potential for investors, especially as infrastructure builds out, significantly enhancing profitability.
See More
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- Election Outcome: Japan's ruling Liberal Democratic Party (LDP) secured a supermajority in the recent elections, allowing Prime Minister Sanae Takaichi to return to power, which indicates strong voter support for her administration.
- Economic Policy Initiatives: Takaichi's agenda includes increasing defense spending and suspending certain food-related taxes, which is expected to stimulate economic growth and enhance consumer confidence, positively impacting Japan's economy.
- Market Reaction: Following the election results, Japanese stocks reached a record high, with the yen strengthening to 156.88 per dollar, reflecting renewed investor confidence in the government's future policies and economic direction.
- International Market Trends: U.S. markets also showed strong performance post-election, with major index futures rising, indicating global investor interest in tech stocks, particularly in the AI sector, further contributing to the overall market recovery.
See More
