We came across a bullish thesis on Microsoft Corporation (MSFT) on Substack by Long-term Investing. In this article, we will summarize the bulls’ thesis on MSFT. Microsoft Corporation (MSFT)’s share was trading at $409.75 as of Feb 7th. MSFT’s trailing and forward P/E were 33.02 and 31.15 respectively according to Yahoo Finance.
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Microsoft’s recent earnings report highlighted strong performance in key areas despite external pressures, notably from a new low-cost AI model launched by DeepSeek, a Chinese company. The model, developed for just $6 million, has raised concerns about the viability of costly U.S. AI data center investments. Nevertheless, Microsoft demonstrated impressive results, with revenue increasing 12% year-over-year to $69.6 billion, operating income rising 17% to $31.7 billion, and net income growing 10% to $24.1 billion. The company’s earnings per share also grew by 10%, reflecting strong operational execution. Microsoft’s guidance for fiscal year 2025 remains positive, projecting continued growth across revenue and operating income, underpinned by its focus on efficiency gains from its AI infrastructure. The company expects slight year-over-year improvement in operating margins, as it capitalizes on operating leverage.
Microsoft’s ongoing partnership with OpenAI remains integral, with OpenAI continuing its commitment to Azure, which has contributed significantly to Microsoft’s cloud bookings. Despite the emergence of Stargate, a new AI initiative involving Softbank, Oracle, and the U.S. government, Microsoft remains confident in its AI strategy. While some have raised questions about the future of AI investments in light of DeepSeek’s competitive model, Microsoft continues to prioritize its AI initiatives and scale its infrastructure. Its cloud and enterprise businesses continued to perform well, with Azure showing 31% year-over-year growth, despite missing analysts’ expectations of 33%. This shortfall led to a 5% drop in Microsoft’s stock price post-results. Over the past two years, Microsoft’s stock has underperformed relative to other large-cap tech stocks, but at a share price of $415, it remains reasonably valued with a P/E ratio of 27.9x, offering strong returns on equity and projected earnings growth.
Microsoft’s cloud division, including Azure, continued to drive revenue growth, reaching $25.5 billion, up 19% from the previous year. The Productivity and Business Processes segment, including Microsoft 365, grew by 14%, bringing in $29.4 billion. However, the More Personal Computing segment, which includes Windows OEM and devices, saw modest growth of just 4%. A key highlight was the 175% year-over-year growth in Microsoft’s AI business, which surpassed a $13 billion annual revenue run rate. Despite the underperformance in Azure growth, driven in part by a focus on AI cloud growth, Microsoft’s capital expenditures remain robust, with $22.6 billion spent on AI and cloud infrastructure. This level of investment, along with a 67% increase in commercial bookings driven by OpenAI’s commitments to Azure, reinforces the importance of AI to Microsoft’s business.
Microsoft’s AI business, including products like GitHub Copilot and Azure AI Foundry, has seen significant growth, with GitHub Copilot now used by over 150 million developers and Azure AI Foundry attracting over 200,000 monthly active users. These developments underscore Microsoft’s leading position in the AI space. CEO Satya Nadella addressed concerns about the efficiency of AI investments, noting that improvements in AI infrastructure are already yielding significant cost reductions and performance gains. Nadella also highlighted how scaling AI infrastructure globally, along with the principles of Moore’s Law, has led to exponential improvements in AI training and inference, further fueling demand for Microsoft’s cloud and AI services.
In conclusion, while external factors like DeepSeek’s low-cost AI model raise some questions, Microsoft’s performance across its cloud and AI businesses remains strong. The company’s continued investments in infrastructure, AI scalability, and its strategic partnership with OpenAI position it well for future growth. The increasing demand for efficient AI models and applications will likely continue benefiting Microsoft, ensuring its leadership in the cloud and AI markets. Despite recent challenges, the company’s stock remains attractive at current levels, with a solid outlook for fiscal year 2025 and beyond.
Microsoft Corporation (MSFT) is on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 279 hedge fund portfolios held MSFT at the end of the third quarter which was 279 in the previous quarter. While we acknowledge the risk and potential of MSFT as an investment, our conviction lies in the belief that some 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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Disclosure: None. This article was originally published at Insider Monkey.