Microsoft's worst Wall Street quarter since 2008 due to AI concerns

Microsoft recently experienced its toughest quarter on Wall Street since the financial downturn of 2008, as investor confidence in the tech giant's AI ventures dwindled.

Shares took a steep 23% drop in the first quarter, a decline more significant than its tech rivals or the Nasdaq, which decreased by 7% during the same period.

Microsoft shares saw a slight recovery on Tuesday, climbing 3.3%—the largest increase since July—amid a broader market surge.

Although Microsoft continues to lead in workplace productivity software and with its Windows OS, the company is challenged with expanding its AI efforts efficiently and enhancing its cloud AI infrastructure to accommodate increasing demand.

There is a spike in oil prices due to the conflict in Iran, which may elevate the expenses associated with building and operating data centers.

Additionally, Microsoft's AI assistant, Copilot, has yet to gain substantial traction as users lean towards services from Google, OpenAI, and Anthropic.

"Redmond is in a tough spot," wrote Ben Reitzes, an analyst at Melius Research, in a note dated March 23, referring to Microsoft's headquarters. Reitzes, who maintains a hold rating on the stock, noted Microsoft must utilise valuable Azure cloud capacity to address Copilot's issues, though it's crucial "since Copilot is key to sustaining growth in its most profitable and extensive segment."

Simultaneously, software stocks are being hit hard amid an AI-driven "SaaSpocalypse" that has pushed companies like Adobe, Atlassian, and ServiceNow down by over 30% this year.

"Many traditional SaaS offerings are fading or entering a likely irreversible decline," Jason Lemkin, founder of SaaStr, commented this week in a post on X, referencing the acronym for software as a service.

In a blog post, he highlighted that software earnings multiples lag behind the S&P 500.

According to Capital IQ, Microsoft's multiple hasn't been this low since the fourth quarter of 2022, when OpenAI launched ChatGPT.

Gil Luria, an analyst at DA Davidson, shared with CNBC that the selling isn't warranted and recommends buying shares.

In the latest quarter, Microsoft reported nearly 17% revenue growth, an improvement from the previous year.

"The disconnect between Microsoft's fundamental performance, stock performance, and valuation is the widest it's been in decades," Luria stated. He predicts the company will outpace the market in earnings growth this year.

"There's nothing in enterprise software that's more established than Microsoft Windows and Office," he said.

In an effort to expand its revenue streams from productivity software, Microsoft has been pushing the Microsoft 365 Copilot AI add-on.

However, so far, just 3% of commercial Office users have signed up for it. Luria has access to 365 Copilot but mentioned he's not a fan.

More critically, Microsoft has pricing leverage with Office subscriptions. The company announced plans to raise prices in December.