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It’s not been a good week for Microsoft (NASDAQ:MSFT). But with OpenAI looking like the firm’s answer to Meta’s Reality Labs and Cloud growth slowing, should I add it to my list of stocks to buy?
The stock is down 6% since the start of the week. And while a forward price-to-earnings (P/E) multiple of 27 isn’t obviously cheap, it’s hard to remember investors being this pessimistic about the stock.
OpenAI
Let’s start with DeepSeek. The Chinese AI startup has launched its own large language model (LLM) and it appears to be outcompeting OpenAI’s ChatGPT – at least, for now.
There are those who are sceptical of claims about how much it cost to build and what computing power it had access to. But Satya Nadella – Microsoft’s CEO – isn’t one of them.
One reason is that innovation is almost inevitable in the tech sector. The best firms adapt to change, rather than fending it off, and Microsoft has been as good as anyone at doing this over time.
Nadella expects more of the same with AI. The idea is the growth of LLMs will lead to them becoming commodities, so that customers won’t care about which one they get.
In general, this isn’t a good thing for an industry because it makes it harder to raise prices. But in this situation, having lower costs is more important – and Microsoft’s scale gives it a big advantage.
As Nadella pointed out, this is essentially what has happened with cloud computing. And the winners from this have been Microsoft, Alphabet, and Amazon – the big US tech companies.
Azure
On that subject, another reason the stock has been falling this week is because investors were unimpressed with its latest results. Specifically, its Intelligent Cloud division fell short of expectations.
This could be a bigger problem than the risk of OpenAI not getting a good return on its investments. Intelligent Cloud contributes 43% of the firm’s total revenues and 45% of its operating income.
Revenues from Azure’s division were up 19%, which sounds good. But in the context of a unit that has been growing at above 30% on average over the last couple of years, it’s a disappointment.
Microsoft put the problem down to the fact it hasn’t been able to ease supply constraints. Specifically, it hasn’t managed to build enough data centres to meet customer demand.
The slow revenue growth is set to continue for the next quarter. But the firm is expecting this to get back to 32% after that as it works through its capacity issues.
One of the key things to watch in the week ahead will be how Alphabet and Amazon are faring. Both companies report earnings and I’ll be looking carefully at how fast their cloud divisions are growing.
A buying opportunity?
I think the market’s reaction to the emergence of DeepSeek has been something of an exaggeration. Whether or not it’s good news for Microsoft, I think its stake in OpenAI is small in context.
The faltering in its Intelligent Cloud division, however, looks more significant. So while the share price coming down isn’t enough to convince me to buy the stock yet, I’ve added it to my watch list.
