By Emily Bary
The OpenAI and Nvidia narratives need to come back into fashion in order for Microsoft shares to move meaningfully higher
Microsoft's stock is one of only two in the &#34;Magnificent Seven&#34; that's cheaper now than it was at the start of 2024.
Microsoft's tight relationship with OpenAI was once seen as an asset. Lately it's been an albatross of sorts.
Shares of Microsoft (MSFT) are essentially flat over the past six months, even as the company has posted the fastest cloud growth of the three big providers. One worry is that OpenAI, whose business is helping fuel that robust cloud growth, might spread more of its work around. Another fear is that OpenAI simply may not end up the winner of the chatbot wars, despite its head start.
That also gets at Alphabet's (GOOG) (GOOGL) ascent. Google has made strides with its Gemini chatbot, helping to lift the shares of its partners as well.
&#34;There's been a leadership change, specifically within technology, that companies around the ecosphere of OpenAI have started to pull back relative to the ecosphere around Google, and time will tell whether or not that shift has staying power,&#34; Matt Stucky, chief portfolio manager for equities at Northwestern Mutual Wealth Management, told MarketWatch.
Read: As ChatGPT turns 3, here's what's crashing the party
For that reason, the big catalyst for Microsoft's stock next year might be something outside the company's control: The OpenAI and Nvidia (NVDA) universes need to come back into fashion.
New models from companies like OpenAI, Anthropic and xAI are being trained on Nvidia's Blackwell Ultra and expected out in the first half of next year. For Microsoft stock sentiment to improve, those models need to &#34;take a leapfrog above where Gemini 3 is today,&#34; Stucky said.
If that happens, &#34;the partnership that Microsoft has with OpenAI looks much better than it looks today,&#34; because investors will feel more confident in OpenAI's ability to get further funding, invest in its business and pay up for Microsoft compute capacity, he added. Microsoft itself has a 27% stake in OpenAI.
Don't miss: Why Microsoft's controversial OpenAI partnership is actually a safety net for the stock
Hedge funds seem to be viewing Microsoft shares &#34;with apathy,&#34; according to Mizuho trading-desk analyst Jordan Klein. He thinks the stock could take off if Azure cloud-computing growth picks up, thanks to new capacity coming online.
Then again, constant-currency Azure growth accelerated from 31% in last year's December quarter to 34% in the March quarter to 39% in the June quarter, before holding at that level in the September quarter. And Klein acknowledged in a recent note that he's &#34;been wrong here for six months&#34; by expecting strong numbers to excite investors.
Aside from Amazon.com's stock (AMZN), Microsoft's is the only other member of the &#34;Magnificent Seven&#34; whose forward price-to-earnings multiple has come down since the start of 2024, according to UBS. And while Microsoft's 15.7% stock gain in 2025 through Friday hasn't been disastrous, it does lag the S&amp;P 500 index's SPX 17.8% increase for the year.
For some investors, that might spell opportunity. &#34;It's a high quality name and it's trading at a fairly attractive price relatively versus the rest of the space,&#34; Stucky said. Microsoft's forward price-to-earnings multiple is 27.7, versus its five-year average of 31.7, according to LSEG.
See also: Big Tech stocks are getting cheaper, and that could mean gains of up to 60%
Investing in Big Tech stocks now requires a more selective approach, UBS analysts say, as trading correlations fall between the major players. Microsoft's relative cheapness - the stock now has a lower forward P/E than Apple's stock - stands out to the analysts there.
So do the company's scale and moat. They note Microsoft's 445 million Office 365 users, which give the company &#34;an installed base that is second to none.&#34;
&#34;Moreover, it is nearly impossible to disrupt since every office worker would have been trained on Excel or Word and it would be very risky, difficult and costly to switch to alternatives,&#34; the UBS team wrote.
Microsoft's Office 365 business is one place where the company is trying to infuse its Copilot AI offering, which is the company's attempt to monetize AI by selling enterprises and consumers on assistive features. Those efforts have been &#34;a disappointment&#34; so far in terms of customer uptake, according to Stucky.
&#34;You're in a state now where sentiment towards the product is poor,&#34; he said, to the point where it &#34;can't get a whole lot worse.&#34; Investor attitudes toward Copilot could improve if customers were to start incorporating the AI tools into their workflows more, he added.
More from MarketWatch: Why Oracle and these 3 unloved software stocks could be the next leg of the AI trade
-Emily Bary
This content was created by MarketWatch, which is operated by Dow Jones &amp; Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
12-29-25 0739ET

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<p>Microsoft's stock has remained flat despite strong cloud growth, raising concerns about its partnership with OpenAI. Analysts suggest that for Microsoft's shares to rise, OpenAI and Nvidia need to regain investor interest. Hedge funds are currently apathetic towards Microsoft, but some see potential due to its attractive price-to-earnings ratio compared to peers. The company's Office 365 user base remains strong, but the uptake of its AI features has been disappointing. Overall, investor sentiment is cautious, with hopes pinned on future developments in AI and cloud computing.</p>

- Microsoft's stock has remained essentially flat while the company experiences rapid cloud growth, raising concerns over its ties to OpenAI.  
- Experts believe that Microsoft's stock performance could improve if OpenAI and Nvidia regain popularity, and if new AI models surpass competitors like Google's Gemini.  
- Despite challenges, Microsoft's relative affordability and robust Office 365 user base may present investment opportunities, although adoption of its AI tools, like Copilot, has been disappointing.

Microsoft's business is on fire. So how can its stock break from its curse?