By Angela Palumbo

Big tech valuations have come down this year, with Microsoft a notable standout. That doesn't mean now is the time to buy.

The Magnificent 7 -- which got its name as investors bought up shares in companies with heavy exposure to artificial intelligence -- hasn't looked that grand in recent weeks, and there are several reasons for the declines.

D.A. Davidson analyst Gil Luria told Barron's the companies saw extraordinary earnings growth in 2023 and 2024, which led to a surge in investments from Wall Street. However, several continue to spend billions of dollars on AI initiatives, and earnings growth has slowed.

There's also general concern around the economy as inflation is still hot and interest rates remain high. President Donald Trump's tariff proposals have also negatively impacted investor sentiment.

"Uncertainty isn't good for technology companies," Luria said. "They make long-term investments, and if they don't know what the economic environment or tariff regime is, it's very hard for them to make long-term decisions."

Meta Platforms is the only member of the Mag 7 in the green for the year, with a 13% gain. Meanwhile, Amazon.com has declined 4.5% in 2025 while Apple has dropped 4.4%, Microsoft has fallen 6.9%, Nvidia has slumped 10%, Alphabet has sunk 11%, and Tesla has tumbled 28%.

Valuations have also come down for all members this month, but Microsoft's stands out. According to Dow Jones Market Data, Microsoft is currently trading at 27.3 times earnings expected over the next 12 months. That's its lowest price to earnings multiple since April 25, 2023, right around the start of the AI trading boom. The S&P 500 is trading at 21.3 times forward earnings.

"The big challenge for Microsoft over the last few quarters is that they continue to increase the rate of investment in capital expenditures while their revenue is decelerating," Luria said. "So they're investing more and getting less return on that."

Microsoft said in a blog post on Jan. 3 that it is on track to invest approximately $80 billion on AI in 2025. However, the company also provided disappointing revenue guidance on Jan. 29.

When it comes to putting money in AI initiatives, Microsoft is a top investor in OpenAI, the parent company of ChatGPT. China recently introduced DeepSeek, which is cheaper for developers to use than OpenAI's models, specifically the latest ChatGPT 4.5 that was unveiled on Thursday. DeepSeek also isn't the only competing model out there.

Luria said if OpenAI's models aren't improving and if growth at that company stalls, it could impact Microsoft's ability to grow.

Still, there is positive news coming out of Microsoft, including an announcement last week that it had reached a milestone in quantum- computing and unveiled its Majorana 1 chip. Microsoft analysts are also mostly bullish on the stock. Of the 58 surveyed by FactSet, 54 say the stock is a Buy, four say it's a Hold and none say it's a Sell.

Luria rates Microsoft as a Neutral with a $425 price target. When asked if he thinks now is the time to take advantage of a lower stock price and valuation, he told Barron's, "not quite yet."

"If Microsoft gets its capex under control while still driving revenue growth, that will be the time to invest," he said.

Write to Angela Palumbo at angela.palumbo@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

February 28, 2025 15:29 ET (20:29 GMT)

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