Software stocks did not have a great start to 2026. The iShares Expanded Tech-Software ETF (IGV) fell more than 20% from its recent peak, and when its 50-day moving average dropped below its 200-day, it confirmed a "death cross" that pushed many investors to sell.
After two years of heavy buying on AI hype, reality started to set in. Many software companies admitted that building AI features is expensive, with about 70% saying those costs are hurting margins.
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Microsoft Corporation (MSFT), which makes up about 8-8.4% of the iShares Expanded Tech-Software ETF, has been right in the middle of this reset.
The stock dropped 10% after reporting strong earnings, beating both revenue and profit estimates, but investors still cut its valuation as Azure growth slowed slightly from 40% to 39%. That same concern showed up again in July when Citi analyst Tyler Radke cut his price target on Microsoft from $620 to $570. He pointed to ongoing multiple compression across software, even while keeping a "Buy" rating and expecting a strong fiscal Q4. Citi has now lowered its target several times this year, from $690 to $660 in January and from $635 to $600 in April, each time staying positive on the stock.
Microsoft's fundamentals are still strong, but its valuation keeps getting adjusted. So is this just short-term pressure, or something more lasting?
Microsoft runs a broad business built on the Azure cloud, workplace software like Microsoft 365 and Dynamics, and products like LinkedIn, Windows, and gaming. A big part of its strength comes from steady, recurring revenue and long-term enterprise customers.
Even with that, the stock has been under pressure, down 23% over the past 52 weeks and 18.6% year-to-date (YTD).
That pullback has brought valuation closer to peers, with Microsoft now trading at a forward price-to-earnings ratio of 20.51 times compared to the sector average of 24.29 times. The company still returns cash to shareholders, offering a 0.92% dividend yield, below the tech average of 1.37%, but backed by 24 straight years of increases. Its forward payout ratio is 21.42%, and it pays quarterly.
Source: Yahoo Finance Top News — This article was automatically imported from the source. Read full article at original source →
