When one of Wall Street’s most powerful banks calls a stock “the most under-owned megacap,” it’s worth paying attention.
Morgan Stanley just made that call on Microsoft today, a company that has fallen into bear market territory after earnings that disappointed Wall Street, but showed significant strength across the company’s business. Morgan Stanley’s call comes at a time the stock is trading at its lowest multiple in years, but investors fear more downside ahead.
Morgan Stanley’s Contrarian Thesis
Microsoft (NASDAQ:MSFT | MSFT Price Prediction) has become Wall Street’s most interesting paradox. The stock has plunged 18% year-to-date and sits 14% below its one-month high, yet Morgan Stanley’s analysts view the institutional underweighting as a potential setup for repositioning.
The fundamentals support a contrarian view. Microsoft reported $81.27 billion in revenue for Q2 2026, with Microsoft Cloud revenue hitting $51.5 billion, up 26%. The Intelligent Cloud segment grew 29% year-over-year to $32.9 billion. CEO Satya Nadella stated: “We are only at the beginning phases of AI diffusion and already Microsoft has built an AI business that is larger than some of our biggest franchises.”
Analyst consensus is overwhelmingly bullish: 57 buy or strong buy ratings versus just one hold and zero sells, with a consensus price target of $596 — implying 50% upside from current levels around $397.
So now that we’ve covered the good news, why are shares continuing to sell off?
Why Microsoft Has Struggled
The disconnect between fundamentals and price action is jarring. Microsoft beat Q2 revenue estimates, delivering $81.27 billion against expectations of $80.4 billion. Adjusted earnings of $4.14 beat estimates of $3.92.
The stock was trading at $543.47 when Fiscal Q1 earnings were filed, then fell to $482.52 by the Q2 filing January 28th, an 11% drop despite beating EPS estimates. Today its trading for 17% lower than where it closed the day before its latest report.
Investors are concerned about figures ‘beneath the surface’ of Microsoft’s latest earnings. Microsoft is spending aggressively on infrastructure, but the revenue payoff remains uncertain. The More Personal Computing segment declined 3% year-over-year, raising questions about whether AI investments are cannibalizing legacy businesses.
Reddit sentiment reflects the confusion, with one viral thread asking “Why are people so bearish on MSFT?” garnering 394 upvotes and 374 comments.
Microsoft’s 365 Commercial Cloud revenue increased 17% last quarter. Its 365 Consumer cloud grew 29%. Dynamics grew 19%. These are all very healthy numbers, but investors are broadly selling off software stocks. There’s a fear many of Microsoft’s cash cows could come under pricing pressure in the next two years.
Microsoft needs to invest in compute to defend all of these franchises; it needs to make them resilient against threats from AI. It needs to answer the question, why are customers still paying for Excel in 5 years.
Yet, defending these franchises means shifting growth away from Azure. Microsoft is facing a powerful one-two punch right now. It needs to shift resources from Azure, which leads to disappointing cloud growth AND investors fret its core franchises could begin decelerating as AI’s capabilities rise in the coming years.
Fresh Catalyst: $50 Billion Global South Push
Microsoft announced today a $50 billion investment by end of decade to bridge the AI divide in the Global South, targeting India, Africa, Southeast Asia, and Latin America with infrastructure buildout, multilingual AI capabilities, and local partnerships. This directly counters a key bear argument: that Microsoft’s growth is limited to saturated Western markets. These regions represent billions of potential users who haven’t yet migrated to cloud infrastructure.
The Contrarian Setup
Morgan Stanley’s “most under-owned” call matters because institutional positioning drives stock prices. Underweight managers scramble to buy on any positive catalyst. Microsoft’s 76.5% institutional ownership suggests room for rotation back into the name.
Microsoft isn’t a speculative AI play. It’s a $2.95 trillion company with 39% profit margins and 34.4% return on equity. Morgan Stanley’s view is that the bad news is already priced in, though investors will need to weigh that thesis against ongoing uncertainty around AI returns and revenue growth.
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