The symbiotic relationship between AI and crypto is still in its nascent stages, according to tech execs.
Dan Loeb is known as a mover and a shaker in the investing world. He founded the New York-based hedge fund Third Point in 1995. It now has roughly $11.5 billion in assets under management. Loeb’s net worth stands at $3.3 billion, according to Forbes.
The activist investor did some moving and shaking in his hedge fund’s portfolio in the fourth quarter of 2023. Loeb reduced his stakes in Amazon (NASDAQ: AMZN) and Microsoft (NASDAQ: MSFT). However, the billionaire investor bought another “Magnificent Seven” stock.
Taking profits
Loeb sold 210,000 shares of Microsoft in Q4. While this reduced Third Point’s stake in the tech giant by over 9.4%, Microsoft remains the second-largest holding in the hedge fund’s portfolio.
The billionaire investor has owned Microsoft off and on since 2006. He most recently initiated a new position in the fourth quarter of 2022, just in time to ride the generative AI wave started by OpenAI’s launch of ChatGPT. Microsoft was a major beneficiary of this wave thanks to its partnership with OpenAI.
Third Point first owned Amazon in late 2019 and held the stock through the second quarter of 2022. Loeb didn’t stay on the sidelines long with the e-commerce and cloud services leader. He initiated a new position in Amazon in the second quarter of 2023. Although he reduced Third Point’s stake in the stock by nearly 10.3% in Q4 2023, Amazon still ranks as the hedge fund’s third-largest holding.
Why did Loeb trim his positions in Amazon and Microsoft? The most likely reason is he wanted to take some profits. Both stocks delivered impressive gains last year.
A bigger bet on Meta
Although Loeb cooled somewhat on two Magnificent Seven stocks, he placed a bigger bet on Meta Platforms (NASDAQ: META). The hedge fund manager increased Third Point’s stake in Meta by nearly 5.5% in Q4 2023. The $410.6 million value of the position made Meta the sixth-largest holding for Third Point at the end of 2023.
Loeb’s history with Meta goes back to the second quarter of 2016 when he first bought the stock. He owned shares of the social media company for a little over two years before exiting the position. The activist investor again bought Meta stock in the second quarter of 2020 and maintained a position through 2021 Q4. Loeb went back to the well in the third quarter of 2023 with another new stake in Meta.
Like Amazon and Microsoft, Meta enjoyed a generative AI tailwind last year. However, I suspect that wasn’t Loeb’s primary reason for adding to his position in the stock. Instead, my hunch is that Loeb liked Meta’s moves to increase its profitability.
Those efforts are paying off. Meta’s earnings more than tripled year over year in 2023 Q4. Full-year profits jumped 69%.
Did Loeb make the right moves?
In one sense, Loeb went one for three with these Magnificent Seven transactions. Loeb’s decision to increase Third Point’s stake in Meta is already paying off. Meta stock has skyrocketed over 45% since the end of 2023. However, Amazon and Microsoft are also up by double-digit percentages year to date. Loeb could have made more money by holding his shares in both companies.
However, trimming the positions in Amazon and Microsoft could still have been the right call for Loeb. Both stocks make up significant percentages of Third Point’s portfolio. You can’t blame any investor for wanting to ensure their holdings aren’t overly concentrated in a handful of stocks.
Over the long term, I think that Loeb — and other investors — will be well served by owning all three of these stocks. Amazon’s and Microsoft’s cloud businesses should continue to grow robustly thanks largely to AI. I like Meta’s focus on business messaging and smart glasses with embedded AI assistants. I predict Amazon, Microsoft, and Meta will remain magnificent for a long time to come.
Should you invest $1,000 in Meta Platforms right now?
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Billionaire Dan Loeb Sold Amazon and Microsoft but Bought This “Magnificent Seven” Stock was originally published by The Motley Fool
The speed with which artificial intelligence (AI) caught on last year took many investors by surprise, and it sparked a changing of the guard among the ranks of the world’s most valuable companies. Apple was finally dethroned by Microsoft, which now tops the list as the only company that currently has a market cap of more than $3 trillion. Nvidia, fueled by its industry-leading AI processors, has tripled over the past year to take the No. 3 spot, behind Apple with $2.6 trillion. Alphabet, Amazon, and Meta Platforms are all major players in the AI revolution and also members of this auspicious fraternity.
With a market cap of just $53 billion (as of this writing), it might seem like hyperbole to suggest that Super Micro Computer (NASDAQ: SMCI), also called Supermicro, could make a run at the $1 trillion club. However, the accelerating demand for AI-centric servers and the company’s decades of expertise suggest that Supermicro is a dark horse candidate in the race.
Servers of the stars
While Supermicro has been creating customized server solutions for more than 30 years, the company was working in relative obscurity until the accelerating adoption of AI kicked off. It turns out that Supermicro has amassed quite a pedigree out of the glare of the spotlight.
Supermicro has built its reputation by providing highly customizable, energy-efficient, liquid-cooled rack-scale servers designed to handle the rigors of AI and hyperscale data centers. The company has developed strong working relationships and works hand-in-hand with all the top AI chipmakers to ensure its rack-scale servers are top performers while also providing energy efficiency and the lowest total cost of ownership in the industry. It boasts partnerships with Nvidia, Advanced Micro Devices, and Intel, among others.
This is a winning strategy that has its AI-centric servers flying off the shelves. For its fiscal 2024 second quarter (ended Dec. 31), Supermicro’s revenue surged 103% year over year to $3.7 billion, while its earnings per share (EPS) of $5.10 jumped 85%. Management is forecasting its triple-digit growth will continue, raising its full-year guidance to $14.5 billion, which would represent growth of 104%.
Management reports that Supermicro grew five times faster than the industry average over the preceding 12 months, suggesting the company is stealing market share from its rivals. Analysts at Northland agree, suggesting the company has increased its market share to 11%, leaving “plenty of room for future share gains.”
The path to $1 trillion
Supermicro is in an enviable position among AI server makers. The company is small enough to be nimble and has a long history of providing customized server solutions to enterprises. Furthermore, the strong and enduring relationships Supermicro has forged with chipmakers give it the inside track and an abundant supply of the processors used for AI. Despite those advantages and the clear opportunity, a lot will have to go right for Supermicro to join the ranks of the trillionaires.
According to Wall Street, Supermicro is poised to generate revenue of $14.7 billion in 2024, giving it a forward price-to-sales (P/S) ratio of roughly 3.6. Assuming its P/S remains constant, Supermicro would have to grow its revenue to about $275 billion annually to support a $1 trillion market cap. To be clear, the company is currently ramping up production to support annual sales of $25 billion, so revenue of that magnitude is still a ways off.
If the company were able to keep up its triple-digit, year-over-year growth, Supermicro could reach the $1 trillion market cap threshold by 2031. That said, it’s unlikely the company will keep up its current rate of parabolic growth. If we cut its revenue growth rate assumption to 50%, Supermicro could potentially reach a $1 trillion market cap by 2035.
There’s reason to believe strong demand for AI-centric servers will continue. BofA analyst Ruplu Bhattacharya suggests the data center market will grow at a compound annual growth rate (CAGR) of 50% over the next three years, and Supermicro’s revenue could grow even faster.
Nvidia CEO Jensen Huang is equally bullish, suggesting that the installed base of data centers will double to $2 trillion over the coming four to five years.
If Supermicro captures even a small part of that vast opportunity, the company will soon join the $1 trillion club.
Should you invest $1,000 in Super Micro Computer right now?
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Danny Vena has positions in Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Super Micro Computer. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Bank of America, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
1 Unstoppable Stock That Could Join Microsoft, Apple, Nvidia, Alphabet, Amazon, and Meta in the $1 Trillion Club was originally published by The Motley Fool
Apple and Microsoft each have their selling points, but only one can be the better investment.
Fool.com contributor Parkev Tatevosian compares Apple (AAPL -0.67%) and Microsoft (MSFT -0.22%) to determine which is better for long-term investors.
*Stock prices used were the afternoon prices of April 5, 2024. The video was published on April 7, 2024.
Parkev Tatevosian, CFA has positions in Apple. The Motley Fool has positions in and recommends Apple and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Parkev Tatevosian is an affiliate of The Motley Fool and may be compensated for promoting its services. If you choose to subscribe through his link, he will earn some extra money that supports his channel. His opinions remain his own and are unaffected by The Motley Fool.
Microsoft is set to advertise its popular artificial intelligence product, Copilot, during the Super Bowl LVIII on Sunday, Feb. 11, according to a Feb. 7 blog post.
Microsoft executive Yusuf Mehdi said:
“This year, we’re proud to celebrate the transformative power of AI and Microsoft Copilot, showcasing peoples’ ‘watch me’ moments with Copilot enabling people to do things previously unattainable.”
Mehdi said that, alongside the ad launch, Copilot has been updated with a new “streamlined look and feel” on the web and mobile. He added that the current announcement marks one year since Microsoft began to offer AI-powered services through Bing Chat.
Medhi also emphasized the growth of Copilot and said that users have created more than 5 billion chats and 5 billion images so far.
Microsoft simultaneously published its ad spot on YouTube on Feb. 7, labeling the video its “Game Day Commercial.”
The video shows Copilot’s use in various tasks, including generating code, content, and images. The company has aired at least six other Super Bowl advertisements — singular ads in 2020, 2019, 2014, and 2000, along with two in 2015.
Microsoft’s latest ad follows earlier reports from CNN on Feb. 2, which suggested that AI ads would essentially be absent from the Super Bowl. Nevertheless, two AI-related ads from Etsy and Google are also expected during the game.
Crypto ads not expected
Crypto ads are expected to be absent from the game, with FOX reporting on Feb. 9 that no crypto-related ads are planned, confirming CNN’s earlier reports.
Crypto exchange Kraken confirmed to FOX that it has not placed a Super Bowl ad, with CMO Mayur Gupta calling the game a “U.S.-centric event.” He further stated that the next wave of crypto marketing will likely focus on education and awareness rather than hype.
Similarly, other crypto-related firms do not plan to advertise during the game.
BlackRock recently became one of the first asset managers to issue a spot Bitcoin ETF and has begun advertising that product in various ways. However, sources close to BlackRock told FOX that the firm has not placed a Super Bowl ad this year.
FOX added that it is “unclear” whether Coinbase will be featured, noting that the firm runs frequent television ads and has placed one past Super Bowl ad.
When Satya Nadella replaced Steve Ballmer as Microsoft CEO in February 2014, the software company was mired in mediocrity. Its market cap was just over $300 billion.
A decade later, Microsoft’s valuation has swelled tenfold, to $3.06 trillion, making it the world’s most valuable public company, ahead of Apple. It’s firmly entrenched as a leader in key areas, such as cloud and artificial intelligence.
As Nadella marks his 10-year anniversary at the helm, he’s widely praised across the tech industry for changing the narrative at Microsoft, whose stock fell 30% during Ballmer’s 14 years at the top. In that era, the company was squelched by Google in web search and mobile and was completely left behind in social media.
Many tech industry analysts and investors would say that, thanks largely to Nadella, Microsoft is now set up to be a powerhouse for the foreseeable future.
Nadella “is special and someone to be considered as one of the GOATs among tech CEOs,” said Aravind Srinivas, co-founder and CEO of AI startup Perplexity, which has the backing of Amazon founder Jeff Bezos. The acronym GOAT stands for greatest of all time.
There are plenty of obstacles in Nadella’s way as he pursues further growth.
Microsoft CEO Satya Nadella speaks during a keynote address announcing ChatGPT integration for Bing at Microsoft in Redmond, Washington, Feb. 7, 2023.
Jason Redmond | AFP | Getty Images
Regulators are concerned about Microsoft’s power. Rivals are jealous. Some clients are skeptical about spending even more money on the company’s AI tools when they already allocate so much budget to so many Microsoft products. And Microsoft, along with its tech peers, has dealt with mass layoffs of late, cutting 10,000 jobs in early 2023, and eliminating 1,900 in January from its gaming division.
One of Microsoft’s biggest sore spots when Nadella took over was the closed nature of its products. Microsoft was known to defend its proprietary Windows and Office software and denounce open-source alternatives. Interoperability wasn’t the most popular word.
“There was a little bit of a take-it-or-leave-it culture,” said Aaron Levie, co-founder and CEO of cloud storage vendor Box, which spent its early years going directly after one of Microsoft’s products. Nadella has made the company more attentive to customers’ needs, Levie said. The two companies now have multiple product integrations.
Larry Ellison, co-founder and executive chairman of Oracle Corp., speaks during the Oracle OpenWorld conference in San Francisco on Oct. 22, 2018.
David Paul Morris | Bloomberg | Getty Images
Nadella’s Microsoft has also formed partnerships with some of its fiercest rivals. In 2023 Oracle co-founder Larry Ellison visited Microsoft’s headquarters in Redmond, Washington, for the first time, as the companies made a joint cloud announcement. In a 2020 interview, Pat Gelsinger, then CEO of VMware, said offering his company’s software on Microsoft’s Azure cloud was akin to a “Middle East peace treaty.” Gelsinger now runs Intel, which makes chips for PCs running Microsoft Windows and clouds such as Azure.
In the Nadella age, Microsoft has also contributed to open-source projects, released software under open-source licenses and released a version of its Teams communications app for Linux.
Nadella has surprised people in other ways.
Michael Nathan was a senior director at Microsoft until 2016, when he left for a job in venture capital. Nathan said he told Nadella about the opportunity after the two of them left a customer meeting in Silicon Valley. Instead of getting angry or making the situation awkward, Nadella told him to take what he’d learned at Microsoft and share it.
“I was like, ‘What?'” Nathan said. “That was amazing. He totally lifted the burden of having that conversation.”
He’s also decisive. In 2018, Nadella came to believe in the idea of buying GitHub just 20 minutes after Nat Friedman, then a Microsoft corporate vice president, started pitching him on it. Right away, Nadella suggested that Friedman become GitHub’s new CEO, Friedman said. Microsoft paid $7.5 billion for the code-storage startup.
Microsoft declined to provide a comment for this story.
Nobody would mistake Nadella for Ballmer, the showman. His predecessor was known for dancing on stage at conferences and hyping up crowds of thousands. Ballmer is now the owner of the NBA’s Los Angeles Clippers and can frequently be seen behaving similarly courtside.
Steve Ballmer, former chief executive officer of Microsoft Corp., gestures as he speaks during a news conference after he was introduced as the new owner of the Los Angeles Clippers in Los Angeles, California.
Kevork Djansezian | Bloomberg | Getty Images
While Nadella may not bring as much entertainment value, he’s proven to be more effective than Ballmer when it comes to dealmaking. In addition to GitHub, Nadella has made pricey acquisitions such as LinkedIn, Minecraft parent Mojang, and Nuance Communications that have contributed to Microsoft’s top line. Ballmer was not so lucky. His aQuantive and Nokia deals were disastrous.
More recently, Nadella helped Microsoft land the $75 billion acquisition of game publisher Activision Blizzard, a deal that investors won’t know how to assess for a while. And in AI, Nadella is credited for investing billions of dollars in startup OpenAI, leading to product enhancements and cloud revenue from customers both new and old, and giving Microsoft a leadership position in an emerging market.
Nadella is perhaps best known in the tech industry for pushing Microsoft deeper into cloud computing. Azure, which delivered 30% revenue growth in the most recent quarter, was started during the Ballmer years. But Nadella brought it to life, transforming it from a research project into a product, said Kevin Dallas, CEO of database software company EDB and a 24-year Microsoft veteran.
“I’m shameless in saying I look at him as a leader that I’ve learned from, grown from,” Dallas said. “I continue to watch him.”
In looking at the road ahead for the 56-year-old Nadella, here are some of the biggest challenges in his way:
Relevance
Retention
Some Microsoft employees have been there for over 20 years. Many will leave after far less time. For years, employees have said they can make more money at other big tech companies. Some have received higher compensation after leaving and then returning. Microsoft has $81 billion in cash and might want to use more of the stash to keep talent — especially the top tier — around for longer.
Products
Microsoft critics often say the company rarely gets it right the first time with new hardware or software and that it’s best to wait for the third version. Reviewers didn’t take kindly to the original 2012 Surface tablet, for example. Today’s Surface gets better marks, but it’s nowhere near the most popular tablet on Amazon — the iPad is. Microsoft remains weak when it comes to building products in new categories, a former executive said. The company’s dual-screened Surface Duo phones running Android haven’t caught on, and Microsoft Loop, a response to modern productivity apps such as Notion, has yet to catch fire in app stores.
Regulation
Antitrust officials have recently blocked acquisitions at Adobe and Amazon. They tried and failed to squash Microsoft’s purchase of Activision. But Microsoft’s big push in AI has come through an investment, not a purchase. The Federal Trade Commission’s Lina Khan said in January that the agency will examine cloud providers’ investments in AI startups. Microsoft has also drawn inquiries in Europe over its cloud practices. Regulatory crackdowns are nothing new at Microsoft, which infamously changed some of its behavior following a high-profile case brought by the U.S. Justice Department in the 1990s.
OpenAI relationship
In regulatory filings, Microsoft calls OpenAI “our strategic partner.” The unusual nature of the arrangement was on display in November, as Nadella worked overtime to get Sam Altman back on top at the startup after the board fired Altman suddenly. Microsoft and OpenAI compete to sell AI services to companies and have a relationship that can cause internal tension. In allocating graphics processing units to OpenAI, for example, Microsoft is sometimes depriving its other departments of them, two people familiar with the matter told CNBC. Altman told Nadella onstage at an event in November that the two companies have “the best partnership in tech.” However, OpenAI isn’t always satisfied relying on Microsoft as its cloud supplier, one of the people said.
Following the November brouhaha, Nadella was at least able to get Microsoft a seat on OpenAI’s board. An OpenAI spokesperson told CNBC that the company views Microsoft as a very good partner.
Next big thing
Nadella is constantly searching for the next category that can generate revenue and profit. The company’s HoloLens augmented reality headset, announced in 2016, hasn’t become a big hit. Nadella hoped that an AI Copilot added to the Bing search engine in February 2023 would convert into share gains, but Google remains the clear leader in that category. Nadella did say on a conference call this week that Bing gained share in the fourth quarter. While AI might be Microsoft’s next big thing, the company will have to continue to find new ways to drive growth.
Nadella has plenty to keep himself busy for now. Analysts on average see enough expansion to project a 12% gain in the stock price over the next year, according to FactSet.
WATCH: Microsoft is ‘so far’ ahead of competition and taking market share, says Jefferies’ Thill
OpenAI launched its current version of ChatGPT in late 2022 and along with it came heightened investor interest in anything related to artificial intelligence (AI). Since then, Microsoft (MSFT 1.84%) and Alphabet (GOOG 0.58%) (GOOGL 0.86%) have emerged as two AI leaders, defining the category and its applications. Microsoft is a close partner of OpenAI, and Alphabet quickly revealed its answer to ChatGPT — Bard — shortly after ChatGPT was released.
Nearly a year after Microsoft unveiled its AI-infused Bing Chat and Alphabet launched Bard, the two companies reported earnings for the October-to-December quarter. Investors sold off both stocks on the news they reported, suggesting that the AI stock boom may be overdone. And yet, both companies delivered solid numbers.
Let’s dig into each company’s recently released report and see which one is the better AI stock to buy today.
Image source: Getty Images.
Microsoft reports broad-based growth
Microsoft recently took the title of the world’s most valuable company from Apple, and the company’s earnings show why. To be fair, the enterprise software company closed on its acquisition of Activision Blizzard in October, so its results are getting a modest bump from the quarter a year ago.
Microsoft’s fiscal 2024 second-quarter revenue rose 18% year over year to $62 billion, which topped analyst estimates at $61.14 billion. Its operating income jumped 33% year over year, or 25% on a non-GAAP (generally accepted accounting principles) basis. On the bottom line, earnings per share (EPS) also rose 33% year over year, or 26% on a non-GAAP basis, to $2.93. That too came in ahead of estimates.
Microsoft’s cloud was once again a bright spot for the company as its intelligent cloud segment grew 20% year over year with Azure revenue up 30%. Search and news advertising revenue growth was modest at 8% year over year, indicating that Bing Chat hasn’t taken off the way the company hoped.
Microsoft finished the after-hours session down 0.3%.
Alphabet comes up short on a key metric
Alphabet delivered a solid fiscal 2023 fourth-quarter report overall as the company continues to recover from the slowdown in the digital ad market. Revenue rose 13% year over year to $86.3 billion, ahead of the consensus at $85.3 billion, but ad revenue of $65.5 billion was slightly below expectations, which helped drive the stock price down 6% in after-hours trading.
The weaker-than-expected ad-revenue growth seemed to indicate that Alphabet was losing ad-market share to competitors or that AI has yet to have a significant impact on ad spending.
On the bottom line, EPS surged from $1.05 to $1.64 due to a $2 billion improvement in equity securities. Operating income rose 30% to $23.7 billion.
Ad revenue rose 11% to $65.5 billion in part due to continued weakness in Google Network, where revenue declined again. Google Cloud, its other closely watched business segment, posted 26% growth to $9.2 billion, and it reported operating income of $864 million, up from a loss of $186 million in the quarter a year ago.
The head-to-head comparison
Both Microsoft and Alphabet saw strong stock-price appreciation last year, and each company reported similar growth on the top and bottom lines in the recent quarter. The difference between the two companies comes down to their AI strategies, and Microsoft appears to have the edge here.
The company introduced its AI-powered Copilot into a wide range of products, including the Office 365 suite, Github, Azure, and Bing. Microsoft management also said that AI drove six percentage points of revenue growth in Azure, pushing it from 24% growth to 30%, which is significant and likely to improve.
Finally, compared to Alphabet, Microsoft seems to have been better prepared for the AI revolution as it made acquisitions like Github that fit well with its AI Copilot tools, and its investment in OpenAI has been a game-changer.
Alphabet, on the other hand, acquired the AI research lab DeepMind several years ago but didn’t integrate with Google Brain until last year. The Google parent has had the technology to roll out its own chatbot, but it let OpenAI and ChatGPT set the narrative with AI chat.
Why Microsoft is the better AI stock to buy
Alphabet is no slouch in AI, but the Google parent lacks the strategy and applications to fully leverage the power of generative AI in the way that Microsoft has.
Microsoft, on the other hand, has planned for this moment and has taken smart risks, including allying with OpenAI. It also has a much more diversified product range compared to Alphabet, which makes most of its money from ads, a business that so far has not seemed to benefit significantly from AI.
Microsoft stock is more expensive than Alphabet, but it’s the better AI stock to buy here. Its long-term prospects with the new technology still look considerably more promising.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Apple, and Microsoft. The Motley Fool has a disclosure policy.
The rage for artificial intelligence (AI) stocks is showing no signs of cooling off. That’s why Microsoft (MSFT -2.69%) management made sure to mention AI tech prominently in both the press release and during the conference call detailing its fiscal second quarter of 2024 earnings.
Those results, divulged just after market hours on Tuesday, beat analyst estimates and featured some impressive numbers. And while AI certainly played a part in that, it was actually another set of offerings from the tech giant that really gave its quarter some muscle.
No cloudy skies with the cloud
Microsoft’s second frame of the fiscal year saw the company book slightly over $62 billion in revenue, which was a sturdy 18% improvement over the same quarter of fiscal 2023 and topped the company’s guidance of $60 billion to $61 billion. Not to be outdone, non-GAAP (adjusted) net income advanced by 26% year over year to hit nearly $22 billion ($2.93 per share).
Analyst expectations for the quarter were relatively modest. On average, they were expecting the tech giant to earn slightly over $61 billion on the top line, and post a per-share, adjusted net income figure of $2.78.
Microsoft posted estimate-beating quarters throughout calendar 2023, but the rise in its shares was due more to its association with top AI app developer OpenAI. Microsoft is a major investor in — and partner of — the company, which is the entity behind the popular ChatGPT app. Microsoft has assertively incorporated OpenAI functionalities into more than a few of its offerings, including the Office software suite.
In the earnings release, the only quote Microsoft attributed to its CEO Satya Nadella was about, yes, AI. The company’s leader briefly enthused about the technology, saying that by applying it at scale, it’s helping to gain new clients and improve productivity throughout its operations.
What didn’t get as much attention, and probably should have, was Microsoft’s cloud computing products and services. The company is the No. 2 provider of such offerings — behind Amazon‘s mighty Amazon Web Services (AWS) — and is doing well in drawing fresh revenue from this source.
During the quarter, the company’s Intelligent Cloud business segment saw its revenue balloon by 20% year over year to nearly $26 billion. Inside that grouping, the still-hot Azure and other cloud services saw their collective take rise at a 30% clip, outpacing the analyst expectations of under 28%.
The AI and cloud combination is already potent
Even if AI — still a relatively young technology — wasn’t a mighty driver of Microsoft’s growth for the quarter, it still made a difference. The company said it now has about 53,000 clients for Azure AI, its anchor cloud-based AI platform. Nadella said that one-third of that figure comprises customers new to Azure within the past year.
This portends very well for Microsoft’s future. However, judging by the market’s rather tepid reaction to the quarterly results — the stock was trading slightly down after hours as of this writing — investors haven’t yet fully considered this potential. So even though the company’s shares zoomed higher in 2023, in this year and beyond, they can certainly hit even loftier heights.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Microsoft. The Motley Fool has a disclosure policy.
Microsoft Corp. posted beats across the board with its latest results Tuesday afternoon, calling out momentum in the cloud and traction with artificial intelligence.
Microsoft’s
MSFT,
Azure and other cloud-services businesses posted revenue growth of 28% on a constant-currency basis in the fiscal second quarter, with that rate coming in ahead of the 27% growth that analysts tracked by FactSet were expecting.
What stood out to analysts was that AI services contributed 6 percentage points to Azure’s growth in the December quarter, up from 3 points in the September quarter. On the earnings call, UBS’s Karl Keirstead called the lift “extraordinary.”
Meanwhile, Microsoft’s management expects to see similar overall growth for Azure in the current quarter. “Growth will be driven by our Azure consumption business with continued strong contribution from AI,” Chief Financial Officer Amy Hood said on the earnings call.
Despite the upbeat results and AI commentary, however, shares of Microsoft slipped about 0.3% in after-hours trading following the call. Could the stock’s recent rally over the past three months (up 21%) and past 12 months (up 69%) have something to do with the muted response?
“AI is becoming a major story, but at this point it’s well-known and was priced into the stock,” David Russell, TradeStation’s global head of market strategy, said in an email.
See also: Alphabet’s stock dips because advertising was good, but not good enough
In his view, “traders could very well take profits and rotate to cyclicals, like financials and industrials, given the increasingly solid economic data,” meaning that Microsoft’s report “may be a sell-the-news event,” or at least one that makes investors shrug.
Overall, Microsoft recorded $62.0 billion in revenue for its fiscal second quarter, up from $52.7 billion a year earlier. Analysts were modeling $61.1 billion.
“By infusing AI across every layer of our tech stack, we’re winning new customers and helping drive new benefits and productivity gains across every sector,” Chief Executive Satya Nadella said in the company’s press release.
During the December quarter, Microsoft generated $19.2 billion in revenue from its productivity and business-processes segment, which houses Office. Analysts were modeling $18.6 billion.
Heading into Microsoft’s report, analysts were curious about the impact of AI on Microsoft’s software portfolio, especially after the company launched Copilot, an AI assistant for its Microsoft 365 product, late last year. The company didn’t offer too much detail on Tuesday’s call but hinted at traction.
“While it’s early days for the Microsoft 365 Copilot, we’re excited about the adoption to date and continue to expect revenue to grow over time,” Hood said on the call.
Intelligent-cloud revenue was up 20% to $25.9 billion, while the FactSet consensus was for $25.3 billion.
The More Personal Computing segment, which includes Xbox and Windows, saw revenue rise 19% to $16.9 billion and edging ahead of the consensus view, which was for $16.8 billion.
“A stronger-than-expected performance from Activision was offset by the weaker-than-expected console market,” Hood said.
Microsoft posted net income of $21.9 billion, or $2.93 a share, up from $16.4 billion, or $2.20, in the year-ago quarter. Earnings per share came in ahead of the consensus view, which was for $2.79.
See also: These 4 software stocks are ‘underloved.’ Here’s what could get them appreciated.
Nvidia‘s (NVDA -0.95%) stock price has more than quadrupled over the past three years. Most of that rally was driven by the rapid expansion of the artificial intelligence (AI) market, where its data center GPUs are used to process complex AI tasks.
Two of its better-known customers are OpenAI, the creator of ChatGPT, and its top backer Microsoft. However, Meta (META 0.24%) has also been spending billions of dollars on Nvidia’s data center GPUs every year.
Image source: Getty Images.
That’s why it wasn’t all that surprising when Meta CEO Mark Zuckerberg recently said his company would install 350,000 of Nvidia’s top-tier H100 GPUs in its data centers by the end of 2024. Zuckerberg didn’t disclose how many H100s Meta had purchased so far, but Nvidia only launched the GPU with a limited supply in late 2022.
Nvidia is currently selling the H100 for $25,000 to $30,000 each, according to analysts at Raymond James, which implies that Meta will probably spend roughly $8.8 billion to $10.5 billion on Nvidia’s GPUs over a two-year period. Let’s see why that’s a bright green flag for Nvidia — and what it tells us about Meta’s near-term challenges and longer-term plans.
Why Meta’s support is great news for Nvidia
Nvidia generated $29.1 billion in revenue, or 75% of its top line, from its data center chips in the first nine months of fiscal 2024, which started last January. That’s up from 52% of its total revenue in the first nine months of fiscal 2023.
The bulls believe this business will continue expanding as the AI market grows, but the bears expect the AI market to cool off and for new competitors to enter the ring. Meta’s big GPU purchases counter those bearish claims in two ways.
First, Meta probably wouldn’t spend about $10 billion — equivalent to about 17% of its combined capital expenditures (capex) of $31 billion in 2023 and $28 billion in projected capex for 2024 — on Nvidia’s H100 GPUs if it thought the AI market was cooling off. Instead, the social media giant probably expects that market to heat up as cloud leaders including Amazon, Microsoft, and Alphabet‘s Google expand their own AI ecosystems.
According to Precedence Research, the broader AI market could grow at a compound annual growth rate (CAGR) of 19% from 2023 to 2032. Fortune Business Insights expects the generative AI niche to expand at an even faster CAGR of 47.5%. Providing the building blocks for that booming market could drive Nvidia’s stock a lot higher.
Second, Meta allays some concerns that Nvidia’s largest customers will replace its GPUs with their own in-house chips. Meta, Microsoft, Amazon, and Google have all been developing their own AI chips, but their ongoing purchases of Nvidia’s GPUs suggest it could still be years before they produce comparable chips. Instead, their custom chips will probably work in tandem with Nvidia’s GPUs to process AI tasks for the foreseeable future.
What Meta’s GPU purchases tell us about its future
But for Meta, its massive purchases of Nvidia’s GPUs raise some questions about its future. It’s still burning billions of dollars on the expansion of its Reality Labs segment, which racked up steep operating losses of $13.7 billion in 2022 and $11.5 billion in the first nine months of 2023 as it rolled out new augmented and virtual reality devices. Its big GPU purchases from Nvidia could exacerbate that pressure — which already reduced its operating margin from 41% in 2019 to 25% in 2022.
Meta’s revenue growth accelerated throughout 2023 as its core advertising business recovered, but that recovery was mainly driven by Chinese e-commerce marketplaces including PDD‘s Temu and Shein, which ramped up their spending on Meta’s platforms to promote their products to overseas customers. If those companies rein in their ad purchases as Meta increases its spending on the expansion of its data centers and Reality Labs segment, its operating margin will shrink again.
But over the long term, Meta’s data center investments could pay off by making its AI algorithms more effective at crafting targeted ads, figuring out which Reels keep viewers engaged, and calculating the best prices for its programmatic ads. Meta’s collection of first-party data should also completely eliminate its dependence on Apple, which cut off Facebook and Instagram from its third-party iOS data with a major update in 2021.
It’s good news for both companies
Meta’s commitment to Nvidia indicates that the chipmaker will remain a linchpin of the AI market for years to come. It should boost Nvidia’s data center GPU sales and widen Meta’s own moat against other ad-driven tech giants such as Google. Simply put, this big GPU purchase is great news for both companies — although Nvidia will initially generate more sales growth from that deal at the expense of Meta’s near-term margins.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon, Apple, and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.
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