Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / Why Microsoft Is Outpacing Big Tech This Quarter
Transcript
- Lucas: Microsoft is up more than 6 percent over the past five trading days. That's not just beating the S&P 500's 1.6 percent—it's the best performance among the mega-cap tech names this week by a clear margin. Luna: And the rest of the group has been mixed, right? Apple up less than 1 percent, Alphabet flat, Meta up two and a half. What's the catalyst at Microsoft specifically? Lucas: Two big things. First, Azure is gaining share in the cloud infrastructure market. We're seeing enterprises consolidate their cloud spend onto fewer platforms, and Microsoft's hybrid story—letting customers run workloads on-premises and in the cloud—is winning deals that would have gone to AWS or Google Cloud a year ago. Luna: That tracks with what I've heard from some IT decision-makers. They're tired of managing three different cloud consoles. Microsoft's Azure Arc and the tight integration with Office 365 make it the path of least resistance. Lucas: Exactly. The second catalyst is Copilot. For a while, the market was skeptical about whether generative AI would actually generate real revenue for Microsoft. But the latest enterprise renewal cycle shows Copilot for Microsoft 365 is becoming a standard add-on, not a nice to have. Luna: Is there a specific number that shifted the narrative? Lucas: Microsoft disclosed that Copilot annualized revenue run rate crossed $10 billion in the last quarter. That's still small relative to the company's total revenue—about 3 percent—but it's growing fast, and it's high-margin. When you layer that on top of Azure's acceleration, you get a stock that's re-rating. Luna: So let's compare that to Alphabet. Google Cloud is also growing, but it's not as profitable. And Alphabet's core advertising business faces headwinds from regulatory pressure and competition from Amazon and TikTok. Is that why GOOGL stock is flat this week? Lucas: Partly. Alphabet also has the overhang of the DOJ's antitrust case, which could force structural changes to its search business. Microsoft has its own regulatory risks, but they're less existential. And Apple's services growth is slowing because the App Store is maturing and regulatory changes in Europe are opening up sideloading. Luna: It feels like Microsoft is the only mega-cap that's firing on all cylinders right now. But the stock is already up a lot this year. Does it still have room? Lucas: The forward price to earnings ratio is around 33 times. That's not cheap, but it's below its 2021 peak of 37 times. And if Copilot continues to scale and Azure takes more share, earnings could beat estimates. The risk is if enterprise IT spending slows. Luna: There's also the macro backdrop. Fed Governor Michelle Bowman warned this week against raising rates despite the inflation spike. That's generally good for growth stocks—lower rates support higher valuations. Lucas: Right. The market interpreted Bowman's comments as a sign the Fed is done hiking. The ten-year Treasury yield dropped a few basis points after that. That's a tailwind for Microsoft and other high-duration assets. Luna: So if you're building a concentrated portfolio, does Microsoft replace something like Apple or Alphabet? Lucas: I think it depends on your time horizon. Over the next 12 months, Microsoft has clearer catalysts. But Apple has a massive installed base and a services ecosystem that could re-accelerate if the regulatory picture clears. I'd rather own both than swap one for the other. Luna: That's a balanced take. But it's worth noting that the S&P 500 is up 1.6 percent this week, and Microsoft alone contributed about a third of that gain. The index is getting more concentrated in a few names. Lucas: It's a real risk. The top five stocks in the S&P 500 now make up over 25 percent of the index. If Microsoft stumbles, the whole market feels it. That's why having a diversified portfolio—even if you concentrate your best ideas—still matters. Luna: Yeah, and speaking of things that matter, I want to take a quick step back. If our conversations about stocks and markets have helped you think about your own portfolio differently, there's a simple way to support the show. It's buy me a coffee dot com slash fexingo. Lucas: And it genuinely makes a difference. Listener support is what keeps this podcast ad-free and focused on the analysis rather than selling you something. Luna: Exactly. So if today's episode was worth a coffee to you, that's the link. Now back to the question of whether Microsoft can keep this momentum. Lucas: Let's look at the competitive landscape. Amazon's AWS is still the cloud market share leader, but it's losing share. AWS had about 32 percent of the market last quarter, down from 34 percent a year ago. Azure went from 23 to 25 percent in the same period. Luna: So it's a direct transfer. And Google Cloud is stuck at around 11 percent. It's really becoming a two-horse race. Lucas: For enterprise workloads, yes. And Microsoft has an edge with the installed base of Office and Windows. When a company already pays for Microsoft 365, adding Azure and Copilot is a natural upsell. Luna: One risk I'm watching is that Microsoft's capital expenditures are ballooning. They're spending heavily on data centers and GPUs to support AI workloads. That depresses free cash flow in the near term. Lucas: True. CapEx was up about 40 percent year-over-year last quarter. But management has been clear that they're building capacity for demand they already see. If that demand materializes, the return on that investment could be substantial. Luna: And they have the balance sheet to do it. Over $70 billion in cash and short-term investments. They're not taking on debt to fund this buildout. Lucas: Exactly. So the bull case is straightforward: Microsoft is the best-positioned incumbent to monetize AI at scale, and it's gaining share in its core cloud business. The bear case is that CapEx doesn't pay off or that competition from Amazon and Google intensifies. Luna: What about valuation relative to history? You mentioned the forward P/E of 33. How does that compare to its five-year average? Lucas: The five-year average forward P/E is about 30. So it's a slight premium, but not extreme. And Microsoft's earnings growth has been accelerating—earnings per share grew 18 percent last quarter. At 33 times, you're paying a reasonable multiple for that growth. Luna: So it's not a value stock, but it's not a bubble either. It's a quality growth stock at a fair price. Lucas: That's a fair summary. And in a market where the S&P 500 is trading at 22 times forward earnings, paying 33 for a company with durable competitive advantages and accelerating growth doesn't seem crazy. Luna: I think the key takeaway for listeners is that not all mega-caps are created equal. Microsoft is executing better than its peers right now, and that's reflected in the stock price. But it's also a reminder to look under the hood—don't just buy the index and assume you're diversified. Lucas: Exactly. The index is increasingly concentrated, so you need to understand what you own. Microsoft is a great company, but it's also a big part of your portfolio if you own the S&P 500. Make sure that's intentional. Luna: And if you want to dig deeper into the numbers, all the data we discussed is public in the latest 10-Q. We'll link to it in the show notes. Lucas: Next week, we'll look at a smaller name that's been flying under the radar. But for now, thanks for listening. If this episode made you think about your portfolio differently, you know where to find us.