Is Microsoft a Drop-Dead Bargain? 1 Wall Street Analyst Thinks So

Key Points
Microsoft is now down a third from its peak in late October.
Bank of America sees the stock going to $500.
Its cloud infrastructure business is clearly benefiting from AI.
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Microsoft (NASDAQ: MSFT) has probably been the most consistently dominant tech company of the last 50 years.
However, in the AI era, which Microsoft helped spark with its OpenAI partnership, Microsoft suddenly finds itself on the outside looking in.
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In less than five months, Microsoft stock has fallen by nearly a third, even as the tech giant has continued to deliver strong results. The Windows-maker has gotten swept up in broader concerns about the AI threat on enterprise software, as virtually the entire software sector has fallen from Anthropic's rollout of new disruptive agents. There have also been anecdotal reports about companies replacing traditional enterprise software programs with custom tools created with AI, often known as vibecoding.
Microsoft now trades at a price-to-earnings ratio of 23 based on generally accepted accounting principles (GAAP) earnings, which is cheaper than it was at its low point during the 2022 bear market, and about the cheapest it's been in ten years.
Microsoft's recent results have also been impressive. In its fiscal second quarter, revenue jumped 17% to $81.3 billion, and adjusted net income rose 23% to $30.9 billion, or $4.14 per share.
Trading at a discount to the S&P 500 and growing 20%, is Microsoft a bargain? One Wall Street analyst thinks so.
Is Microsoft going to $500?
Bank of America reinstated coverage on Microsoft with a buy rating and a price target of $500, implying 34% upside.
The analyst noted that Microsoft is in a unique position among tech companies as it is able to capitalize on AI both as an infrastructure company through its Azure cloud computing service and as a software application provider with products like Office 365.
In an ideal outcome in the AI evolution, those two businesses support each other as customers rely on Azure to provide the AI compute and infrastructure it needs, while they use Microsoft software programs to perform daily tasks and AI workflows. BofA analyst Tal Liani went on to say that Microsoft is "at the center of the AI supercycle" and will be "a primary beneficiary of AI monetization."
That note wasn't enough to lift Microsoft stock as it came out on the same day that Anthropic is roiling the software sector, but the argument is worth a closer look from investors.
The downside looks limited
While Microsoft is likely to soar if Liani is correct that it's at the center of the AI supercycle, it's also worth considering the downside in the stock at this point, with Microsoft already down 33%.
Microsoft is in a much different position from pure-play enterprise software companies like Salesforce and ServiceNow, as it's diversified across multiple businesses, including, in addition to software and Azure, Windows, gaming with Xbox and Activision Blizzard, LinkedIn, ads through Bing and news, devices like the Surface tablet, as well as other products. It also has a stake in OpenAI, valued at $135 billion at the end of October and likely worth more now.
With the 33% sell-off, investors seem to be pricing in the decline of its software business, which is far from a given. Microsoft reports results in three business segments. Its largest by revenue is Productivity and Business Processes at $34.1 billion, which is mostly made up of its cloud software applications. However, its fastest-growing is intelligent cloud, which was up 29% in its most recent quarter to $32.9 billion. Its smallest segment is the More Personal Computing, which brought in $14.3 billion in the quarter.
Productivity and Business Processes still make up more than half of its operating income, but that should change as its cloud unit grows.
Overall, the numbers show that Microsoft's cloud software business is significant, but it makes up less than 40% of the company's revenue. Currently, the stock is priced as if software is on the verge of a decline when it grew 17% in the most recent quarter.
Based on that, the strong growth in cloud and its valuation, Microsoft looks like a buy. It may take a while for the AI disruption narrative to change, but Microsoft is in a better position than any other software company to recover the recent losses.
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Bank of America is an advertising partner of Motley Fool Money. Jeremy Bowman has positions in Bank of America. The Motley Fool has positions in and recommends Microsoft. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.