Microsoft’s stock has fallen 17% year-to-date, trading at a price-to-earnings ratio not seen in a decade, despite the company’s aggressive integration of artificial intelligence across its product lines. Shares currently trade below a P/E ratio of 25, a level last recorded in 2015, raising questions about whether the market is undervaluing the potential of Microsoft’s AI investments.
The company’s AI companion, Copilot, is available to over 450 million commercial users of Microsoft 365, offering features like document summarization and data analysis within applications like Word, and Excel. While initial adoption of the paid version of Copilot remains low at 3.3% of that user base, the number of paid seats has grown 160% year-over-year, reaching 15 million in January, according to Microsoft.
Demand for Microsoft’s Azure AI infrastructure is also reportedly exceeding supply. The company stated in late 2025 that capacity is sold out, with a demand backlog that has doubled to $625 billion, partially driven by commitments related to OpenAI. Azure revenue grew 39% in the fourth quarter of 2025. Though, Microsoft acknowledged that these supply constraints, stemming from power shortages, equipment delays, and the physical limitations of data center expansion, are expected to persist through at least June 2026.
Azure Copilot leverages Large Language Models (LLMs) and insights about a user’s Azure environment to improve efficiency, according to Microsoft. The tool can assist with navigating Azure’s extensive suite of services and resources, and can answer questions tailored to a user’s specific Azure setup. It is accessible through the Azure portal, the Azure mobile app, and through AI Shell.
Despite the potential, Copilot faces challenges. Surveys indicate that user retention declines after initial testing, with users often preferring alternatives for creative and research tasks. Competition from Google Gemini and OpenAI’s ChatGPT is intensifying, with Copilot’s U.S. Paid subscriber share dropping from 18.8% in July 2025 to 11.5% in January 2026. Pricing pressure is also evident, with large deals often including discounts of 40% to 60% to drive volume.
Microsoft is attempting to address these challenges through innovations announced at Microsoft Ignite 2025, including the introduction of Azure Copilot agents and AI infrastructure improvements. These agents aim to streamline cloud operations and automate tasks like migration, app modernization, and troubleshooting. The company is also focusing on strengthening Azure’s global foundation, expanding capacity, and enhancing security and compliance.
Microsoft is integrating Azure AI Foundry with Copilot Studio, offering access to over 11,000 models from providers including OpenAI, DeepSeek, Black Forest Labs, and Meta. This integration aims to combine the rapid prototyping capabilities of Copilot Studio with the deep customization options of Azure AI Foundry.
If Microsoft can successfully increase paid Copilot adoption and resolve its infrastructure capacity issues through planned investments, analysts suggest the current stock price may be undervalued. However, the market remains skeptical, awaiting concrete evidence of progress in these areas as competition continues to escalate and capacity constraints limit near-term execution.
