Analysts at Morgan Stanley say Microsoft (MSFT 1.05%) is in a “pole position” to capitalize on growing demand for generative artificial intelligence (AI)-powered applications like AI agents. These autonomous programs can perform tasks without being told what to do all the time. The market for AI agents is expected to grow 44% per year to reach $47 billion by 2030, according to research from Markets and Markets.
Other analysts seem to agree. Out of 58 analysts that cover the stock on Wall Street, 39 rate it a “buy” and 14 rate it a “strong buy,” according to Yahoo! Finance. The software giant is preparing to spend $80 billion on data centers specifically for training, deploying, and operating cloud-based AI applications.
As the leader in productivity software, Microsoft could become the face of AI for millions of consumers and businesses over the long term. The company is in a great position for long-term growth, but one important thing analysts are not calling out is that the stock’s valuation is expensive compared to other leading tech companies that are also positioned to benefit from AI.
Microsoft is benefiting from growing AI demand
Microsoft’s partnership with OpenAI has been valuable in accelerating the company’s push into AI. Microsoft has launched new AI features across its products. Nearly 70% of the Fortune 500 are using Microsoft 365 Copilot, and more than 100,000 organizations are using Copilot Studio, which offers the ability to connect 365 Copilot with AI agents.
On the previous earnings call in October, Microsoft guided for annualized revenue from its AI business to hit $10 billion during the December-ending quarter. For perspective, it reported total revenue of $65 billion last quarter, up 16% over the year-ago quarter.
Microsoft’s lead in productivity software and enterprise cloud services puts the company in a lucrative position to monetize AI across a large customer base. “We are the market leader when it comes to knowledge-based copilots and agents in the enterprise space, and we are focused on continuing to gain share across our productivity solutions,” CFO Amy Hood said on the last earnings call.
Analysts don’t see AI accelerating Microsoft’s growth
So far, Microsoft has not shown that AI will change its previous average revenue and earnings growth rate. Microsoft expects its productivity software business to be up between 10% to 11% on a constant-currency basis in the December-ending quarter. For the full year, analysts expect revenue to increase by 13%, which is consistent with its average growth over the last five years.
Data by YCharts.
Over the long term, the consensus estimate has earnings growing at an annualized rate of 13%. This is below Microsoft’s average earnings growth over the last 10 years, which was 23%. Despite lower earnings growth expectations, the stock trades at a high price-to-earnings (P/E) ratio of 35. This multiple is higher than its 10-year average P/E of 33.
In other words, investors are paying a higher multiple for earnings that may not grow as fast as its historical average, which is a warning that the stock is too expensive and may underperform expectations.
Microsoft’s valuation is relatively high
Other Magnificent Seven stocks offer higher earnings growth prospects but trade at lower P/Es, which set them up to potentially outperform Microsoft. For example, Alphabet has millions, if not billions, of users across its products, like Gmail, YouTube, and Google Search. Its Gemini AI models could play an important role in capturing demand for AI agents. Analysts expect Alphabet to post annualized earnings growth of 16%, while the stock trades at a 26 P/E.
Social media giant Meta Platforms is using AI to improve the user experience on Facebook and Instagram by driving more relevant content recommendations, and it’s expected to benefit its advertising revenue. Analysts expect Meta’s earnings to grow 17% per year in the coming years, while the stock trades at 29 times earnings.
It’s difficult to call Microsoft stock a “strong buy” when there are other top tech stocks trading at lower valuations. With AI not showing it will accelerate Microsoft’s revenue growth beyond what it has achieved historically, the stock seems more like a hold than a strong buy right now.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and 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.
