Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / Why Microsoft Is Outpacing Big Tech in Cloud AI
Transcript
- Lucas: So Microsoft just reported, and the headline number that jumped out at me wasn't the revenue beat — it was the Azure growth number: thirty-three percent year-over-year, accelerating from the prior quarter. Luna: Thirty-three percent in this environment is pretty striking. Most of the other cloud providers are decelerating. Lucas: Exactly. Amazon's AWS grew about nineteen percent, Alphabet's Google Cloud around twenty-two. Microsoft is lapping them by double digits. And the kicker is that a big chunk of that Azure growth is coming from AI workloads — they explicitly called out AI services contributing eight percentage points to that growth figure. Luna: So AI isn't just a story for them. It's actually showing up in the numbers. Lucas: It is. And that's the key difference between Microsoft and the rest right now. They have the enterprise distribution — the Office install base, the Teams users, the existing Azure contracts — and they're layering AI on top. Their new Copilot for Finance product, which launched last month, is a perfect example: it's a premium add-on that existing Dynamics customers can activate with one click. No migration, no new vendor. Luna: That's a huge advantage. Google and Amazon have to convince companies to try something new. Microsoft is just saying, 'You already use us. Here's more.' Lucas: Right. And the results speak for themselves. Microsoft's commercial bookings — a forward-looking metric — grew thirty-four percent, well above consensus. That suggests the AI upselling is still in its early innings. Meanwhile, Alphabet's cloud growth missed estimates last quarter, and Amazon's margins in AWS actually compressed a bit as they cut prices to compete. Luna: Which brings up an interesting point for stock pickers. If you look at the valuations, Microsoft trades at about thirty-two times forward earnings, Amazon at forty-one, Alphabet at twenty-four. So Microsoft is not the cheapest, but it's also not the most expensive. Lucas: And I'd argue that premium is justified given the growth trajectory. Microsoft is essentially the only big tech company that has both a credible AI story and the distribution to monetize it at scale this year. Amazon's AI offerings — Bedrock, SageMaker — are good, but they're still playing catch-up on the enterprise relationship side. And Alphabet? Their AI is impressive in research, but they've struggled to package it into products that enterprise customers want to pay for. Luna: Let's talk about the broader market context. The S&P 500 hit seven thousand five hundred eighty today, up one point four percent on the week. The NASDAQ is up two point four percent. So tech is leading. Lucas: Yeah, and the VIX is below twelve again. That's near multi-year lows. The market is pricing in a pretty benign environment — no recession, no inflation surprise, no Fed shock. But as a stock picker, that's when you have to be most disciplined, because the easy money has been made. Microsoft's run from around three hundred seventy in January to four hundred fifty today is a twenty percent gain in five months. Can that continue? Luna: That's the question. The bull case is that AI adoption is still early, that Microsoft's total addressable market is expanding. The bear case is that the valuation already reflects a lot of that optimism, and competition from Amazon and Alphabet could intensify. Lucas: I think the key is to watch the enterprise AI adoption rate. If Azure continues to accelerate, the stock can grow into its multiple. But if it decelerates — say, to twenty-five percent or lower — the stock could correct ten to fifteen percent. That's the risk. Luna: It's interesting: a lot of the conversation around concentrated portfolios focuses on finding the one or two big winners. Microsoft feels like a candidate for that kind of bet. Lucas: It does. And if you're building a concentrated portfolio, you have to be willing to hold through volatility. Microsoft isn't a stock for traders. It's a compounder. But you also need to keep asking: is the moat widening or narrowing? Right now, I'd say it's widening. Luna: You know, the quality of the conversation we have on this show depends a lot on the listeners who support it. If you've found these discussions useful — whether it's the microsoft analysis or just thinking about how to approach stock picking — and you want to help keep the show ad-free and independent, you can buy us a coffee at buy me a coffee dot com slash fexingo. It's a simple way to say this is worth supporting. Lucas: Yeah, we appreciate every bit of support. It lets us spend more time on the research and less on the business side. Luna: And we're back to the numbers. So, Lucas, you mentioned the broader market rally. The Dow is at fifty-one thousand thirty-two, up almost a percent on the week. Small caps — the Russell two thousand — are up one point seven percent. So it's not just big tech. Lucas: No, and that's an important nuance. A lot of investors think 'tech rally' and assume it's only the mega-caps. But small caps are actually outperforming the S&P 500 this month. The Russell is up about four percent in May, while the S&P is up three. Luna: What's driving that? Is it the rate cut expectations? Lucas: Partly. Small caps are more sensitive to interest rates because they tend to have more floating-rate debt. The market is pricing in about two rate cuts by year-end, and that's been supportive. But also, there's a rotation happening — some money is moving from the mega-caps into areas that lagged last year. Luna: That rotation could be a headwind for Microsoft near-term, even if the long-term story is intact. Lucas: Exactly. And that's why stock picking isn't just about finding a great company. It's about timing, valuation, and understanding the macro backdrop. Microsoft is a great company, but if you buy it at forty-five times earnings during a rotation, you might underperform for six months. Luna: So what's your takeaway for someone listening who's managing their own portfolio? Lucas: I'd say: if you don't own Microsoft, it's worth considering a starter position, but don't chase the stock up ten percent in a week. Use any pullback to build a position. And if you do own it, hold it — but keep an eye on Azure growth and enterprise AI adoption. Those are the leading indicators. Luna: And for those who prefer a different approach, maybe look at the small-cap opportunity. There are some interesting names there that could benefit from AI indirectly — like IT services firms that help companies implement Microsoft's AI tools. Lucas: That's a great point. One I've been looking at is a company called Globant — they do digital transformation consulting. They're not a household name, but they have a partnership with Microsoft to help enterprises deploy AI solutions. That could be a way to play the theme without the mega-cap valuation. Luna: Let's wrap with a quick look at what's coming next. Microsoft's fiscal year ends in June, so we'll get their Q4 report in about two months. That's the next big catalyst. Lucas: And we'll be watching for the same metrics: Azure growth, AI contribution, commercial bookings. If those stay strong, I think the stock can hold these levels or go higher. But if there's any sign of deceleration, it could get choppy. Luna: Thanks, Lucas. Next episode we'll dig into a different name. Maybe something from the small-cap world. Lucas: Sounds good. Until then, happy stock picking.