1. Microsoft Corp (NASDAQ:MSFT)
Billionaire Ken Fisher’s Stake: $12,187,315,624
Some believe OpenAI was the only key edge Microsoft Corp (NASDAQ:MSFT) had in the AI race and it’s quickly fading away.
DA Davidson recently downgraded the stock, with analyst Gil Luria saying the company’s advantages in the cloud and code generation sectors have diminished, making it difficult for Microsoft Corp (NASDAQ:MSFT) to maintain its previous performance. He highlighted that Amazon Web Services is now nearly matching Azure in cloud growth, while Google Cloud is also gaining momentum.
Luria downgraded Microsoft Corp (NASDAQ:MSFT) from Buy to Neutral, maintaining a $475 price target. He pointed out that Amazon and Google have made significant strides in integrating custom silicon into their data centers, putting Microsoft at a disadvantage. This reliance on NVIDIA (NVDA) for technology means Microsoft is effectively transferring wealth from its shareholders to NVIDIA’s, according to Luria.
Following a year of margin expansion, Microsoft Corp (NASDAQ:MSFT) is now projecting a decline in operating margins due to increased data center capital expenditures rising from 12% to 21% of revenue. This increase outpaces that of Amazon and Google, largely due to Microsoft’s dependence on NVIDIA.
Luria said that if Microsoft Corp (NASDAQ:MSFT) continues to overinvest at the current rate, margins could drop by at least 1 percentage point cumulatively, potentially necessitating layoffs of around 10,000 employees each year to maintain margins.
The analyst also thinks Microsoft Corp (NASDAQ:MSFT) has lost much of its edge with GitHub Copilot, as Amazon and GitLab (GTLB) have caught up in capabilities.
The concerns voiced by the analyst are not unfounded. Microsoft is also losing its edge in open-source models as enterprises shift toward cost-effective, transparent open-source solutions like Meta’s Llama 3.1.
Baron Opportunity Fund stated the following regarding Microsoft Corporation (NASDAQ:MSFT) in its Q2 2024 investor letter:
“Microsoft Corporation (NASDAQ:MSFT) is the world’s largest software and cloud computing company. Microsoft was traditionally known for its Windows and Office products, but over the last five years it has built a $135 billion run-rate cloud business, including its Azure cloud infrastructure service and its Office 365 and Dynamics 365 cloud-delivered applications. The stock contributed to performance because of continued strong operating results and investor enthusiasm regarding Microsoft’s leadership across the secular megatrends of AI and cloud computing. Recent business momentum continued to show evidence of the strength and attractiveness of Microsoft’s product portfolio among its customer set: (1) Azure OpenAI – its suite of AI services – is now used by 65% of the Fortune 100 and contributed 7% of Azure revenue (an annualized run rate of $5.2 billion); (2) GitHub Copilot – its AI code writing service – is bending the productivity curve for developers (reports of 40%- plus improvements in developer efficiency) and now has 1.8 million paid subscribers, with growth accelerating to over 35% quarter-over-quarter; and (3) Copilot Studio – its AI application service that makes it easier for anyone to build an application, automate a workflow, or create a Copilot using natural language. 30,000 organizations across every industry have used Copilot Studio to customize Copilot for Microsoft 365 or build their own, up 175% quarter-over-quarter. In the March quarter, Microsoft again reported better-than-expected financial results, highlighted by Microsoft Cloud growing 23% year-over-year, with the fastest commercial bookings in six quarters, and Azure accelerating to 31% constant currency growth, up from 28% in the previous quarter. June quarter guidance came in-line with consensus, but the company provided higher guidance for the most important segment, Intelligent Cloud, on the back of continued strong trends across Azure and Azure OpenAI. We remain confident that Microsoft is one of the best-positioned companies across the overlapping software, cloud computing, and AI landscapes.”
While we acknowledge the potential of Microsoft Corporation (NASDAQ:MSFT), our conviction lies in the belief that under the radar AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than MSFT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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