Things haven’t been pretty for Microsoft ( MSFT ) investors over the past two years, as the company underperformed its Big Tech peers in both 2024 and 2025. This year isn’t looking any better, with MSFT shares down around 17% for the year. In absolute terms, the stock, which peaked at around $555 last year, is now approaching the $400 price levels, and its market capitalization is around $3 trillion.

Microsoft’s problems intensified after the company released its December quarter earnings last week. Although the company beat the headline numbers, the report spurned markets’ thumbs up, and MSFT shares fell nearly 10%, eroding more than $350 billion in market capitalization in a single day.

After the fiscal second quarter 2026 earnings report, several analysts lowered their price targets, but the stock’s average price target is still above $600 and represents a potential upside of around 50% from those levels. Let’s explore whether MSFT stock can rise above $600 over the next year, as many sell-side analysts seem to believe, or if it’s headed for another dismal year. We’ll start with an overview of their earnings.

The Satya Nadella-led company beat both the top line and the bottom line in the December quarter. However, its earnings still spooked the markets for more than one reason. These include:

• AI Spending Spree: Like other Big Tech peers, Microsoft is doubling down on artificial intelligence (AI) spending, and its capex was $37.5 billion in the quarter, two-thirds of which is short-lived assets. For context, quarterly capex was more than annual capex for fiscal 2023. There are lingering concerns about tech companies’ ability to adequately monetize these investments, which are draining their cash flows. Specifically, Microsoft’s free cash flows fell to $5.9 billion in the quarter.

• Slow down cloud growth: Microsoft’s total cloud revenue rose 26% to $51.5 billion, the first time the metric topped $50 billion in a single quarter. Azure reported revenue growth of 39%, which was below the 40% the company reported in the first fiscal quarter and slightly below Street estimates. Guidance for the current quarter implies a further reduction in growth. However, the company has argued that it has limited capacity in its data center infrastructure and has been balancing internal needs with external customers.

• RPO concentration: While Microsoft said its cloud remaining performance obligations (RPO) more than doubled year over year to $625 billion, it revealed that nearly 45% of that came from OpenAI. Markets were spooked by the concentration risk of Microsoft’s RPOs and are particularly concerned about OpenAI’s ability to deliver on its massive commitments. The parent of ChatGPT has faced stiff competition from Alphabet ( GOOG ) ( GOOGL ) and Anthropic, which have upped their game. To meet the pledge, OpenAI would have to raise billions more over the next two years, as I don’t see the company doing that on its own revenue, no matter how fast it grows.