By Hannah Pedone

Amid a 'flight to quality,' Microsoft's stock has stood out as an AI winner, according to one analyst

StoneX analyst Yi Fu Lee told MarketWatch that Microsoft is a beneficiary of an investor "flight to quality."

Microsoft has won more respect for both its cloud and software efforts, and that could translate into the stock's best quarter in nearly three decades.

Microsoft shares (MSFT) are up 36.4% so far in the third quarter. That puts them on track to notch their strongest quarterly performance since the first quarter of 1998, when they rose 38.5%, according to Dow Jones Market Data.

Part of that performance reflects how the stock had been beaten down to start the year. Its first-quarter drop of 23.5% had been the worst for any quarter since the 2008-09 financial crisis.

But lately, there's been a greater appreciation for the various facets of Microsoft's business. The company has increasingly benefited from a "flight to quality" dynamic, according to StoneX analyst Yi Fu Lee.

Investors hungry for AI exposure have come to see Microsoft as "one of the highest-quality platforms in technology," he said. Wall Street has increasingly focused on companies with a clear story for how they will monetize AI, and Microsoft has checked that box recently, Lee noted.

The company's stock is still basking in the glow of its "exceptionally strong" June-quarter earnings report, which reinforced investors' confidence that its AI investments are generating returns, Lee added.

Ivan Feinseth of Tigress Financial agreed that the strong rally "reflects a meaningful improvement in the evidence behind [Microsoft's] AI investment case."

On top of that, Lee explained that the market "has increasingly shifted from asking who has the best [AI] model" to other questions like who owns the enterprise context - meaning the infrastructure, databases and systems that AI runs on. Microsoft holds a advantageous position as a platform that can host a variety of large language models, whether it be that of OpenAI, Anthropic or another AI developer, he said.

Moreover, Microsoft's announcement last week of its new Copilot AI assistant has strengthened the argument that the company has chances to expand AI revenue beyond its traditional software subscription offerings.

"Microsoft is evolving Copilot from a productivity assistant into a broader enterprise AI platform," Lee said - pointing to Copilot's capabilities across Home, Microsoft's subscription for individuals and families; Code, its coding tool for technical as well as nontechnical users; and Autopilot, a personal AI assistant.

See also: The murky AI milestone that has some of the industry's leading voices increasingly on edge

-Hannah Pedone

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(END) Dow Jones Newswires

09-29-26 1718ET