This Dividend-Yielding Tech Stock Looks a ‘Compelling Buy’ for 2026 After 2 Years of Underperformance
With a year-to-date (YTD) gain of nearly 15%, Microsoft (MSFT) is underperforming both the broad-based S&P 500 Index ($SPX) and the tech-heavy Nasdaq Composite Index ($NASX). The Satya Nadella-led company underperformed last year as well, and its 12% gain in 2024 pales in comparison to its tech peers and the broader market.
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Meanwhile, the “Magnificent 7” who led the market’s rise from the front in 2023 and 2024 did not have the best years, and none of them broke into the top 20 winners list on the S&P 500 Index in 2025. The group’s collective price action has been below average, with only Alphabet (GOOG) (GOOGL) and Nvidia (NVDA) outperforming the averages of the S&P 500 Index by a noticeable margin. Meanwhile, after underperformance in 2025, Wedbush Securities’ Dan Ives, a known perm tech bull, predicts MSFT shares will rise to $625 next year and calls it an “interesting buy.” While tech stocks aren’t actually known for their dividends, and many don’t pay dividends in the first place, Microsoft’s dividend yield of 0.75% is the highest among Magnificent 7 stocks. It’s on the verge of becoming a Dividend Aristocrat.
Microsoft’s underperformance in 2025 is largely due to concerns about emerging artificial intelligence (AI) capex. The company, which previously said capex would fall in fiscal 2026, now sees it rising instead. The Windows parent company spent almost $35 billion on capital expenditures in the first quarter of fiscal 2026, which ended in September; This is a record for the company.
Of course, increasing AI capital spending isn’t Microsoft’s thing, and Amazon ( AMZN ), Meta Platforms ( META ) and Alphabet have also increased spending amid the AI arms race. Except for Alphabet, which entered 2025 with negative expectations and impressed with its financial performance, the other three are performing poorly this year. I find a connection between Microsoft’s poor performance and Alphabet. While Gemini gaining ground on OpenAI’s cost helped GOOG shares rise further, it put pressure on Microsoft, OpenAI’s largest investor and a proxy play on the world’s most valuable unlisted startup.
Despite the underperformance in 2025, the analyst community is not giving up on Microsoft and has a consensus rating of “Strong Buy” from 48 analysts surveyed. bar chart. MSFT shares are trading below even the Street’s lowest target price of $490; The average target price of $629.23 is almost 30% higher than current price levels.
Notably, Ives’ $625 target price is similar to the consensus price target and the same as Wolfe Research, which lowered MSFT’s target price by $50 earlier this month. Looking at the latest action, Prosecutors Davidson and Jefferies maintained their bullish bets on Microsoft this month, while maintaining their respective target prices of $675 and $650.
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I remain constructive on MSFT shares heading into 2026. The stock is trading at forward price-to-earnings (P/E) multiples of 30.6x, which I find balanced. P/E-growth (PEG) multiples look a bit ugly at 1.82x, but that has to do with AI capex impacting the company’s profits in the form of higher capex. “The Big Short” Michael Burry’s controversial views that tech companies are extending the lifespan of AI chips aside, companies like Microsoft will face higher depreciation expenses over the next few years.
But there’s a lot to like about Microsoft at these levels. The stock is a defensive play with a well-diversified business. The company’s Windows and Office business will continue to benefit from an increase in PC sales due to the obsolescence of installed devices and the emergence of AI computers. The end of support for Windows 10 will also help keep this segment alive as more users will feel the urge to upgrade to Windows 11.
Moreover, artificial intelligence is increasing the demand for subscriptions, which will contribute to Microsoft’s revenue. The cloud business is growing particularly fast, with Microsoft closing the gap on market leader Amazon. Notably, during its last earnings call, Microsoft said its commercial cloud remaining performance obligations (RPO) rose 50% to $400 billion at the end of September, with the weighted average only being two years.
Overall, while I am not a persistent bull on MSFT, I have used dips to add to my positions, something I am repeating this time as well. At these levels, I think MSFT stock is a good buy and expect it to deliver double-digit returns next year.
At the time of publication, Mohit Oberoi had positions in MSFT, GOOG, NVDA, AMZN, META. All information and data in this article are for informational purposes only. This article was first published on: barchart.com
