Microsoft: A Diversified AI Play with Attractive Upside

about 1 month ago

Alex

"The third stock that I think Wall Street is making a big mistake on is Microsoft, which is probably the most well-diversified company on the planet between products, software, and services like LinkedIn and GitHub, Visual Studio and SQL, Microsoft 365 and Teams, and Azure and Xbox. Microsoft is also on track to invest around 80 billion in 2025 to build out AI data centers, which was a big increase from what they spent in 2024, and they're going to increase it again in 2026. And just like Oracle, investors are worried that Microsoft won't be able to monetize their AI infrastructure quick enough for shareholders to see real returns on all of these investments. According to Wall Street analysts, the main challenge is that models, data centers, and power costs are already exploding. While user adoption and pricing are still ramping up, that causes a lot of concern about long-term margins and free cash flows from all these AI applications. But just like with Meta Platforms, Microsoft's earnings showed that AI was already a major contributor to Azure's strong sales growth, to rising co-pilot adoption in Microsoft 365 and to solid overall growth in profits even after their increased capital expenditures. DCF models calculate the fair value of Microsoft stock to be around 600 per share, which implies a 25% upside from today's price of around 480."

The speaker presents Microsoft as a mispriced opportunity amid market concerns over AI monetization challenges. Despite worries about rising data center costs and margins, strong performance in Azure and Office 365 alongside robust DCF-based fair value estimates (25% upside) signal that Microsoft is well positioned to capitalize on its diversified business in the AI era.

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