Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / Why Microsoft Is Outpacing Big Tech in Cloud AI
Transcript
- Lucas: Microsoft is up seven-point-six percent this week alone, and it's not because of a broad tech rally — the Nasdaq is up two-point-four percent, so Microsoft is roughly tripling the index. The question is why. Luna: It's a massive move for a two-trillion-plus company. What's driving it? Earnings were a few weeks ago. Lucas: Right, earnings were solid, but the real catalyst this week was a series of enterprise AI contract announcements. Microsoft disclosed that Azure's AI services revenue grew at a hundred-and-eighty-percent year-over-year pace in the latest quarter. And then over the past few days, they announced deals with two of the largest US banks and a major healthcare system — all multi-year commitments worth hundreds of millions each. Luna: So it's not just the raw growth number — it's the visibility into future revenue. That's what the market is rewarding. Lucas: Exactly. The market hates uncertainty, and Microsoft is giving investors a very clear picture of where the revenue is coming from. Compare that to Alphabet, which is down zero-point-seven percent this week. Google Cloud is growing, but it's not growing at the same pace, and the market is starting to question whether Google's AI investments are translating into real customer commitments the same way. Luna: And Amazon is up one-point-six percent, so it's doing okay, but not Microsoft's level. AWS is still the market share leader in cloud overall, but Azure is closing the gap specifically on AI workloads. Lucas: That's the key distinction. AWS has the broadest platform, but when companies decide they want to build custom AI applications, they're increasingly choosing Azure because of the deep integration with OpenAI's models. Microsoft essentially has a first-mover advantage in enterprise AI because they invested early and baked it into the existing Office and Azure ecosystem. Luna: It's a classic bundling strategy. If you're a CIO and you already have Microsoft 365, adding Azure AI services is a much easier sell than switching to a new platform. Lucas: Right. And the numbers back that up. Microsoft's commercial cloud revenue — which includes Azure, Office 365, and Dynamics 365 — hit over forty billion dollars in the most recent quarter. That's a run rate of a hundred and sixty billion. And the AI component is still relatively small, but it's growing at triple digits. So the market is pricing in a lot of future growth. Luna: How much of that is already in the stock price? Microsoft is trading at over thirty times forward earnings. That's not cheap. Lucas: No, it's not cheap. But the argument is that the growth is durable. The enterprise contracts are typically three to five years, so visibility is high. And Microsoft's capital expenditure is ramping — they spent over twenty billion on capex last quarter, mostly on AI data centers. That's a bet that the demand will continue. Luna: It's a bet that's working so far. But if you're a stock picker building a concentrated portfolio, how do you think about Microsoft at this valuation? Do you buy here, or wait for a pullback? Lucas: That's the million-dollar question. I think the smart approach is to look at the risk-reward. Microsoft has become a bit of a consensus trade, and when everyone owns it, the upside is capped by multiple expansion. But the earnings growth is real. If they deliver twenty percent earnings per share growth this year, the current multiple becomes more reasonable. Luna: So you're saying it's a hold, not a buy at these levels? Lucas: For a long-term investor, it's probably a hold. If you don't own it, you could start a small position and add on weakness. But I wouldn't go overweight. The market is giving Microsoft credit for the AI opportunity, but there's also risk — competition from Amazon and Google, regulatory scrutiny on AI, and the possibility that AI spending doesn't materialize as fast as expected. Luna: Speaking of risk, let's talk about what could go wrong. What's the biggest threat to Microsoft's AI narrative? Lucas: I think the biggest near-term risk is that the enterprise AI adoption cycle is lumpy. We saw that with some of the early AI tools — companies experimented, but then budgets got tightened. If we see a slowdown in IT spending, Microsoft could be vulnerable because so much of the growth is tied to incremental AI spend. Luna: And there's the competitive angle. Amazon is investing heavily in its own AI chips and models, and Google has Gemini. They're not standing still. Lucas: Exactly. And the regulatory environment is uncertain. The EU is looking at AI regulation, and the US is starting to have hearings. If there's a crackdown on how AI models are trained or deployed, it could impact Microsoft's ability to monetize its investments. Luna: But for now, the momentum is clearly in Microsoft's favor. The stock is up over twenty percent year-to-date, and it's been a leader in this rally. Lucas: Yeah, and one thing that's interesting is that Microsoft's balance sheet is incredibly strong. They have over seventy billion in cash and short-term investments. So they have the firepower to continue investing through any downturn. That's a margin of safety that a lot of other tech companies don't have. Luna: It's a good reminder that when you're picking stocks, you're not just buying a growth story — you're buying a balance sheet. Microsoft checks both boxes. Lucas: And that's why it's been a core holding for so many fund managers. It's not the most exciting stock, but it's reliable. Though I'd argue the AI story makes it a bit more exciting than it used to be. Luna: For sure. Before we wrap up, I want to mention something that keeps shows like this going. We keep Stock Picking with Fexingo ad-free, and that's only possible because of listeners who chip in a couple of dollars a month. If our conversations have helped you think about a stock or a strategy differently, you can support the show at buy me a coffee dot com slash fexingo. It genuinely makes a difference. Lucas: Absolutely. It's a small gesture that goes a long way in keeping us independent and focused on the analysis, not the ads. So thank you to everyone who's already contributed. Luna: Alright, back to the markets. So Lucas, if you had to pick one stock for the next twelve months — not necessarily Microsoft — what would it be, and why? Lucas: That's tough. I'd probably go with a name that's less crowded. I've been looking at a mid-cap industrial that's benefiting from the reshoring trend — it's not as well-followed, but the fundamentals are solid. But that's a topic for another episode. Luna: Fair enough. We'll leave it there for today. Thanks for listening, and we'll see you next time. Lucas: Take care, everyone.