2. Microsoft Corp (NASDAQ:MSFT)
Number of Hedge Fund Investors: 279
Dan Niles, Niles Investment Management founder and portfolio manager, in a recent program on CNBC discussed Microsoft Corp (NASDAQ:MSFT) and said the stock should “worry” you amid declining Cloud growth and valuation.
“The one that should worry you is Microsoft, and the reason I say that is we’ve all heard of OpenAI and ChatGPT, which really kicked all this off at the end of calendar 2022. Obviously, Microsoft has a huge stake in OpenAI. But if you look at the numbers for Microsoft, their June quarter Azure, which is their cloud business, was growing 35%. Then that went to 34% in the September quarter, and they guided to 31% to 32%. So the numbers are going down. If you look at Amazon, their cloud business has actually accelerated over the last five quarters, from 12% to 19% growth. They’re the biggest. And if you look at Google, which is the smallest of them, their growth accelerated from 29% last quarter to 35% in the quarter they just reported. So you’ve got to ask yourself: is Microsoft actually getting a return for all this money that they’re investing?”
Niles said Microsoft Corp (NASDAQ:MSFT) P/E of 33 is also higher than the market’s 24 and that should also concern investors.
Microsoft Corp (NASDAQ:MSFT) shares recently fell after the company reported its latest quarterly results. Analysts believe most of the revenue beat came from PC segment, while investors were paying more attention to AI and Azure. Azure’s 34% growth met expectations, though guidance for next quarter fell short, projecting between 31% and 32% growth—1 percentage point below forecasts. This dip is attributed to delays in data center capacity from third-party providers, though Azure’s consumption trends remained steady.
Investors hoping for a rebound in IT spending were likely disappointed, as stable Azure consumption suggests no significant uptick in the second half of the year. In addition, the lower-than-expected Q2 guidance underscored tempered growth expectations.
AI services, however, contributed a robust 12 points to Azure’s growth, a steady continuation from the previous quarter. Microsoft’s management confirmed strong demand for AI services, although supply constraints are limiting further expansion. Microsoft Corp (NASDAQ:MSFT) anticipates AI-related revenues, including M365 Copilot and Azure AI, could reach $10 billion annually by next quarter—making it one of the fastest-growing segments in Microsoft Corp (NASDAQ:MSFT)’s history.
Carillon Eagle Growth & Income Fund stated the following regarding Microsoft Corporation (NASDAQ:MSFT) in its Q3 2024 investor letter:
“Microsoft Corporation (MSFT) traded lower following concerns about the sustainability of its data center buildout for generative artificial intelligence (AI). The company continues to show strong growth in its cloud segment, and management highlighted optimism surrounding demand signals.”
