Throughout 2025, Microsoft (NASDAQ: MSFT) has delivered steady returns, appreciating approximately 15% year to date. While this represents a solid performance in absolute terms, it falls slightly short of the broader market's benchmarks, with the S&P 500 index increasing over 16% in the same period. Typically, investors shy away from stocks that underperform the market, but Microsoft's outlook for 2026 could paint a different picture, especially as artificial intelligence (AI) technologies continue to evolve.
This shift in sentiment is underscored by two prominent billionaire investors who significantly increased their holdings in Microsoft stock during the third quarter of 2025. Peter Thiel, renowned for his pioneering roles in PayPal and Palantir Technologies and early investments in Meta Platforms (formerly Facebook), augmented his stake notably. Concurrently, Daniel Loeb, through his hedge fund Third Point, more than doubled his investment, positioning Microsoft as his third-largest portfolio holding.
Peter Thiel and Daniel Loeb Boost Microsoft Stakes
During the third quarter, Peter Thiel made a strategic reallocation of his investment portfolio. He divested sizable portions of his holdings in both Tesla and Nvidia, reallocating some of the proceeds to acquire a $25 million position in Microsoft, marking it as his second-largest holding. This move is indicative of high confidence in Microsoft's prospects for the upcoming year.
Meanwhile, Daniel Loeb's Third Point fund executed an aggressive increase in Microsoft shares, resulting in the technology giant accounting for nearly 7% of his portfolio, up from a significantly smaller fraction. The decisive action positions Microsoft as one of the top assets within Third Point's investment selections, highlighting a bullish stance on the company's future.
Other billionaire investors have also maintained substantial exposure to Microsoft. For instance, Chase Coleman of Tiger Global Management holds Microsoft as the largest position in his portfolio with a weighting of 10.5%, reflecting sustained institutional interest despite a lack of recent additional purchases.
Microsoft's Role in the AI Domain Strengthens Appeal
At the core of this attraction is Microsoft's strategic positioning within the artificial intelligence sector. While Microsoft has not developed its own proprietary generative AI models, it has forged key partnerships with leading AI innovators. The most notable among these is OpenAI, in which Microsoft holds approximately a 27% ownership stake. This connection effectively provides Microsoft shareholders with indirect exposure to one of the most advanced entities in the generative AI space.
Besides AI, Microsoft's regular business segments continue to show robust performance. In its first quarter for fiscal year 2026, ending September 30, 2025, Microsoft reported an 18% increase in revenue relative to the prior year. Earnings per share grew by 13% on a diluted basis. A substantial contributor to this growth is Azure, Microsoft's cloud computing platform.
Azure's revenue surged by 40% in the quarter, significantly outpacing various competitors in the cloud arena. Its growing prominence stems from its capability to host a variety of generative AI models beyond OpenAI's ChatGPT, making it a versatile and attractive environment for AI application development.
Valuation and Future Prospects
Despite these strengths, Microsoft's stock has underperformed relative to the broader market over the past year, a trend that may concern some investors. A potential catalyst for unlocking additional value could be the public offering of OpenAI. Such a move would clarify the valuation of Microsoft's stake in the AI leader, potentially elevating investor perception and share price.
However, Microsoft currently commands a price-to-earnings (P/E) ratio near 35, situating it among the pricier equities in the AI sector on a valuation basis.
While the company demonstrates notable revenue and earnings expansion, its growth rate does not match that of several other AI-oriented firms. This discrepancy may lead some investors to view Microsoft shares as expensive relative to anticipated future earnings growth, which could limit investment returns absent new developments.
Overall, Microsoft presents as a high-quality business with considerable AI integration and cloud growth. Nonetheless, for investors prioritizing rapid expansion, other AI stocks may offer superior prospects. Microsoft's trajectory in 2026 may largely depend on developments such as an OpenAI initial public offering and sustained momentum in its cloud and AI-related services.