- Microsoft shares are down 17% in June — worst month since December 2000 — erasing more than $570 billion in market value and leaving the stock at its cheapest valuation in a decade: 19x forward earnings, a rare discount to the S&P 500’s 20x multiple and well below its 10-year average of 27x.
- The selloff reflects a double-edged fear: that Microsoft’s $190 billion capex commitment through December is outpacing revenue returns, while AI disruption may simultaneously erode demand for its core productivity software — Word and Excel — that underpins the company’s earnings base.
- Michael Burry, whose 2008 housing short inspired The Big Short, disclosed buying Microsoft call options with strike prices in the low $700s expiring in 2028, sending shares up 5.7% to $372.97 on Friday in their best single-day performance since May 2025.
- Bulls point to 17% revenue growth expected in fiscal 2026 (fastest since 2022), accelerating to 18% in FY2028 and 20% in FY2029 — while bears note Stifel cut its target to $400 citing “compressing Azure gross margins from accelerating capex” and estimates that appear “meaningfully too high.”
What Happened?
Microsoft is on pace for its worst monthly performance since the dot-com bust, down 17% in June with more than $570 billion in market cap erased. The stock hit its lowest closing price since 2023 before rebounding Friday after Michael Burry disclosed on Substack that he had bought call options with strike prices in the low $700s expiring in 2028. Friday’s 5.7% move was the stock’s best single day since May 2025. The selloff stems from twin fears: first, that the company’s $190 billion capex forecast through December is compressing Azure gross margins without generating commensurate returns — Q3 earnings in late April showed underwhelming Azure growth; second, that AI tools broadly may reduce demand for the traditional software suite that underpins Microsoft’s earnings. Stifel’s Brad Reback cut his price target to $400 from $415 on June 25.
Why It Matters?
At 19x forward earnings, Microsoft now trades at a discount to the S&P 500 and well below its 10-year average of 27x — a remarkable compression for a company still growing revenue at 17%. The dual anxiety — too much spending, and AI may cannibalize the core business — represents the fundamental unresolved question of the AI era: will companies that invest aggressively in AI infrastructure build durable moats, or will they spend their way into margin compression while open-source alternatives commoditize their products? As Cresset Wealth’s Jack Ablin put it: “Whether Microsoft Word or Excel will be rendered obsolete by AI remains to be seen. But the spending is certainly a concern.” Microsoft is now the most visible live test of that question in the market.
What’s Next?
Microsoft’s fiscal year ends June 30, making Q4 earnings (due late July) the first real test of whether Azure growth is reaccelerating. Burry’s deep out-of-the-money call options suggest conviction that the AI capex cycle will eventually translate to earnings — but over a 2028 horizon. Analysts expect revenue to accelerate to 18% in FY2028 and 20% in FY2029; the question is whether the market will have patience for a multi-year payoff. As portfolio manager Keith Fitz-Gerald put it: “When the AI spending starts to translate into better earnings, this thing will go up like a rocket. In the meantime, the misunderstanding around AI will persist for a while.”
Source: Bloomberg
