Tech giant Microsoft (MSFT) is the canary in the coal mine, according to University of Michigan Ross School of Business professor Erik Gordon. Gordon believes that the recent decline in Microsoft stock is a sign of wider problems in the market, and that artificial intelligence (AI) is likely to prove a massive bubble. This idea did not help matters with investors, who sent Microsoft shares into free-fall, down nearly 12% in Thursday afternoon’s trading.
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Microsoft’s recent plunge, Gordon noted, is a direct consequence of the “…truckloads of cash it is investing in AI.” That in turn served as what he called “…a warning of the burst to come.” But even with this, Gordon does not look for the bubble to burst for several months. Investors are still funneling in cash, which should keep the bubble running for some time yet, and the new technology that is emerging will prove “…exciting enough to distract…” from valuation issues.
This is not the first time Gordon has alerted on these conditions, however. He recently called AI an “…order-of-magnitude overvaluation bubble,” and called upon investors to brace for suffering that would be more painful than the dot-com aftermath. Stocks, meanwhile, have refused to respond to his calls for doom.
Gaming on the Skids
Meanwhile, a key point emerged from Microsoft’s recent earnings call. While the cloud business is doing quite well, and the business support operations are top-notch, the gaming division is falling apart. Gaming revenue is down 9% against this time last year, and hard questions about why are starting to emerge.
Hardware revenue is down, and first-party content is lagging a bit as well. But Microsoft looks for growth to continue through the next quarter in Game Pass, and the special events around the 25th anniversary of Xbox have yet to display their full impact. Still, with signs that Microsoft may be preparing to exit the console wars altogether in favor of a Steam Machine-style entry, it is clear that Microsoft’s gaming future will not look like what it did back in 2015.
Is Microsoft a Buy, Hold or Sell?
Turning to Wall Street, analysts have a Strong Buy consensus rating on MSFT stock based on 35 Buys and one Hold assigned in the past three months, as indicated by the graphic below. After a 16.06% rally in its share price over the past year, the average MSFT price target of $604.60 per share implies 42.63% upside potential.
