Microsoft (NASDAQ: MSFT) has seen its stock price fall 25% from its record high, marking its lowest valuation in more than three years. The decline has sparked debate among investors about whether the company is undervalued or if further declines are on the horizon. At the center of the discussion is Copilot, Microsoft’s AI-powered virtual assistant, which has yet to achieve widespread adoption despite being embedded in key products like Windows, Bing, and Microsoft 365.

Copilot’s Modest Adoption and Growth

Copilot, which can function as both a chatbot and a productivity tool, is available for free through Microsoft’s Windows and Bing platforms. However, businesses must pay for licenses to integrate it into Microsoft 365. Despite this, the adoption rate remains low, with only 15 million licenses sold for 365 as of the company’s fiscal 2026 second quarter, which ended December 31. That represents a penetration rate of just 3.7% among the 400 million 365 licenses in use globally.

Despite the modest numbers, there are signs of growth. Copilot for 365 licenses grew by 160% year over year, and the number of businesses with over 35,000 licenses tripled during the quarter. Daily active users also surged tenfold, indicating that once companies adopt the tool, they tend to expand its use across their workforce.

Data Center Demand and Backlog

Microsoft’s Azure cloud platform, which provides the computing infrastructure for Copilot and other AI applications, continues to grow rapidly. The company reported a $625 billion order backlog as of December 31, a 110% increase from the previous year. This backlog has driven Microsoft to invest $118 billion in building new data centers over the last four quarters, with even more spending planned in the future.

However, a significant portion of this backlog—$281 billion, or 45%—is tied to OpenAI, the startup behind the GPT models that power many of Microsoft’s AI initiatives. OpenAI currently generates about $20 billion in annual revenue and recently raised $110 billion in capital. Even with that funding, analysts question whether it will be enough to meet its commitments to Microsoft and other cloud providers.

Despite the concerns, Azure has maintained strong revenue growth, with at least 39% growth in each of the last three quarters. Microsoft management has stated that demand for cloud computing continues to outpace supply, suggesting that the company has enough customers to absorb additional data center capacity in the near term.

Valuation and Market Position

Microsoft’s stock is currently trading at a price-to-earnings (P/E) ratio of 25.3, the lowest in over three years. This places it at a compared to the Nasdaq-100, which has a P/E ratio of 31.8, and the S&P 500, which currently trades at 24.7. Analysts argue that this undervaluation is puzzling given Microsoft’s status as one of the highest-quality companies in the U.S.

According to financial experts, the opportunity to buy Microsoft at such a low P/E ratio is rare and could be a strong addition to long-term investment portfolios. However, the Motley Fool Stock Advisor team recently identified 10 stocks it believes are better investment opportunities than Microsoft, including companies like Netflix and Nvidia, which have historically delivered substantial returns.

Microsoft’s stock price has been impacted by broader market conditions and the performance of its AI initiatives. While Copilot’s growth is promising, its current adoption rate remains a concern for some investors. The company is expected to continue investing heavily in cloud infrastructure, but the long-term sustainability of its growth will depend on how effectively it can scale Copilot and other AI tools.

As the AI landscape continues to evolve, Microsoft’s ability to maintain its competitive edge in cloud computing and AI development will be critical. The company’s upcoming financial reports and strategic moves will likely be key indicators of whether its stock price will rebound or face further declines.