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S&P 500 shares linked to AI have been hit hard in the past week. Big names including Google, Meta and Intel are down by 7%-12%.
Investors are worried that big technology companies are spending huge amounts on data centres, computer chips and electricity without knowing exactly how quickly profits will materialise.
I can understand the concern but I think the market may be overreacting. After all, that AI spending could still translate into real returns down the line.
However, one business I’m not worried about is Microsoft (NASDAQ:MSFT). It reports first-quarter 2027 results Wednesday (28 October), and its Azure cloud business will be the big test.
Why people are worried
Microsoft was an early AI starter and is still hemorrhaging money here. For example, Q1 capital expenditure is expected to exceed $50bn, compared with $19.39bn a year earlier.
Management also expects around $175bn of capital spending across calendar 2026, although part of that reflects a lease reclassification rather than a sudden spending spree.
The concern is simple. What if Microsoft builds lots of data centres, but customers don’t use them quickly enough? Margins could suffer, and shareholders could wait longer for the payoff.
And brokers are already taking note. Morgan Stanley expects Microsoft’s gross margin to slip to 65.7% this fiscal year from 67.9%.
The concern’s understandable – is blowing $50bn in a quarter a smart strategy? It could be, but only if customers want to pay for what that builds.
Why Microsoft looks different
For a fairly simple reason, I’m more comfortable with Microsoft than with many AI-linked shares as it already has millions of business customers.
Companies already use a wide range of its interconnected products, so it can easily add demand-driving AI features to them rather than try to flog a new product.
Its proprietary AI-assistant, Copilot, is a good example. But what interests me most is Azure.
Management expects the cloud business to grow by 44%-45% in the September quarter alone, while Morgan Stanley expects around 47%. In the latest reported quarter, Azure grew 42% to $29.42bn, with demand continuing to exceed available capacity.
In plain English, people already want more cloud services than Microsoft can supply. That’s a much better strategy than simply blowing cash and praying for the best.
What the experts think
It seems analysts have reached a similar conclusion, with consensus giving it a Moderate Buy and an average price target of $592.15 – 13% above today’s level around $524.
Recent upgrades include:
| Broker | Price target |
|---|---|
| UBS | $675 |
| TD Cowen | $625 |
| Citi | $636 |
| Melius | $665 |
A $675 target seems lofty but doesn’t automatically suggest today’s price is ‘cheap’. It could indicate optimism, not only in the AI narrative, but Microsoft’s broader business.
The bottom line
This isn’t a risk-free idea. If Azure growth slows, margins fall more than expected, or businesses cut back on AI projects, Microsoft shares could still fall hard.
But in my opinion, it’s one of the safest stocks to consider right now for investors seeking AI exposure. I’d own the shares if I didn’t already have broad exposure through several S&P 500 ETFs.
For those watching the upcoming results, focus on Azure growth, the commercial backlog and whether Microsoft keeps spending under control. That means more than just the share price move on the day.
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Mark Hartley does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
