Ross Gerber
CEO of Gerber Kawasaki, Portfolio Manager of GK ETF
Microsoft's strong quarter reinforces the AI trade: it is executing extremely well, and AI's productivity benefits are real, so its beneficiaries will keep investing well into the future. Its very reasonable valuation won't last, as AI slowly becomes the only game in town while high inflation slows consumers. x.com x.comÂ
Microsoft's AI spending is producing faster growth with better economics: Azure accelerated to 48% on a $100B+ base while capex was $39.4B, below expectations. Management then guided Azure to 49-50% and said demand still exceeds supply, ending the debate over whether AI investment is paying off. Overweight, $625 target. x.com x.com x.comÂ
Microsoft's hold on enterprise software and the cloud running AI makes it one of tech's best positions to own. Fiscal Q1 revenue rose 19% on Azure and the AI stack, while operating income rose 21% and net income 32%. Grade: A. x.comÂ
Microsoft and software stocks broadly still look expensive, because AI will get exponentially better over the next two years and the market may reset software valuations much lower. Software valuations have always been ludicrous, and heavy stock-based compensation behind many software revenues is widely ignored. Winners will emerge, but picking them is not worth trying. x.com x.comÂ
Demand for compute remains strong and the AI investment cycle is still running, so the underlying AI opportunity has not changed. But if wars keep inflation high and rates stay higher for longer, even great businesses will see their multiples compressed, damaging the AI trade without necessarily invalidating it. The S&P 500 forward P/E has fallen from 23.2x to 18.7x, a roughly 5.35% earnings yield versus 5.47% on the 20-year Treasury; how long this backdrop lasts is unknowable. x.comÂ
Microsoft's AI ROI is massive because it expects to sustain its current 18% year-over-year growth with 27% fewer employees. It is cutting its workforce by 27%, undercutting claims that AI has no ROI. x.comÂ
Microsoft faces AI disruption that could erode its software moat and compress its high multiple. Chris Hohn, the best stock picker ever and not one to move lightly, cut Microsoft from 10% to 1% of his portfolio, about $8 billion, citing AI disruption. The question that matters is whether a business can be disrupted: when code becomes a commodity the moat erodes, and multiple compression from a high base does severe damage. x.comÂ
Microsoft's results showed that the more it invests in its AI buildout, the more revenue it produces, a value-in-growth story nobody is talking about. The stock rose 10% on gangbusters earnings, and analysts raised price targets citing accelerating Azure growth and stronger-than-expected Copilot adoption. x.comÂ
Microsoft was flagged as an opportunity in an article a few months ago, close to the bottom: the stock's lowest point in a year was $349.21. x.comÂ
AI compute shares face a new threat as AI giants collectively signal a slowdown, the first real cooling of the most crowded and expensive trade of the past year. Asia-Pacific stocks fell 0.9%, the KOSPI 3%, Nasdaq futures 1.2% and SoftBank as much as 13%. If AI capex slows, high-valuation tech must re-prove its profits; with Brent up 2.5% to $107.20 after a key Saudi pipeline closed and the 10-year Treasury yield near 5%, inflation and rates are unlikely to ease fast. x.comÂ
Alphabet's AI capex payback is being repriced, making its post-earnings decline more than a one-day mood swing. Guidance and cloud and AI margin commentary are the near-term tests. If growth continues but the multiple compresses, the risk is duration in mega-cap AI, not a collapse in technology growth. x.comÂ
