It’s easy to be bullish on Microsoft (NASDAQ:MSFT) stock with Artificial Intelligence hype dominating the market. It wasn’t easy in 2017. It wasn’t obvious in 2021. But I have stayed true, and I have been rewarded.
The problem is that all great runs come to an end. It’s just possible, that MSFT stock is coming to its.
A Closer Look at MSFT Stock
There is growing evidence that “Big AI” excitement has peaked.
There have been hints. The collapse of enterprise software stocks was one. The ability of Nvidia (NASDASQ:NVDA) chips to deliver a cloud stack in a single rack was another.
Perhaps most important is the rejection by Apple (NASDAQ:AAPL) of the whole Big AI premise. Instead of using a brute force approach on all the world’s data, Apple Intelligence will make all your data more accessible.
The question is, what does this mean for MSFT stock?
Not as much as you think. Microsoft has a huge moat with Windows and Office. Those revenue flows aren’t going away.
Microsoft could even raise prices without losing subscribers, which may be the true test of a monopoly.
The question mark here is Copilot Pro. The $30/month add-on to Office is the incremental revenue that makes Microsoft worth 38 times earnings.
Microsoft offered happy talk about Copilot in its most recent earnings release. But Copilot wasn’t broken-out in the numbers.
In February, CEO Satya Nadella talked about having 1.3 million GitHub Copilot subscribers, half the Fortune 500 using Azure OpenAI, and GitHub revenue growing 40%, driven by Copilot. Since then it’s mostly been radio silence.
Microsoft is improving the tools that let business see how much their employees are using Copilot. But there is increasing evidence this isn’t improving programmer productivity as much as advertised. Over half developers now report problems with code developed through AI.
The Slough of Disillusionment
Gartner (NYSE:IT) is famous for its “hype cycle,” which holds that new technologies go through distinct development phases. Its AI predictions for 2024, announced in February, are all based on the famous “peak of expectation,” the first leg up.
But this is always followed by a “trough of disillusionment,” a period where the assumptions behind the excitement are questioned.
There’s evidence of the slough everywhere. OpenAI head Sam Altman’s reputation is taking a hit. Microsoft had to recall its Recall tool after critics called it a security nightmare.
There are growing concerns about the safety and security of AI. The question is always, when does this hit Microsoft’s results?
The answer may be soon. While analysts continue to expect growth at Microsoft, they see it settling into the mid teens. Microsoft’s ability to surprise to the upside is declining. ChatGPT and Copilot are now in the numbers.
All this is becoming clearer on Wall Street. After spending most of the year with its market cap ahead of Apple, Microsoft is now behind again. It’s not by much, but it’s based on Apple’s rejection of Microsoft’s own AI direction in Apple Intelligence.
The Bottom Line
Microsoft isn’t a sell at this point.
Every stock goes through ups and downs, and the downs are often an opportunity. This happened with Adobe (NASDAQ:ADBE), one of Microsoft’s key partners, recently.
Shares plunged in March after earnings, with analysts downgrading the stock early this month. Then they shot up again recently after earnings that didn’t beat estimates by any more than the March numbers. It’s still down for the year.
If you own Microsoft for the long term, in other words, hang tight. Only consider selling if you need the money or are desperate for fat capital gains in the near term.
If you don’t own Microsoft, there’s a buying opportunity coming. It could happen when Microsoft reports earnings next month. Or it could happen sooner.
You’ll know it when it comes. When a $3 trillion company goes bump in the night, it’s an earthquake.
As of this writing, Dana Blankenhorn had a LONG position in NVDA, MSFT, and AAPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
