The Market Is Dead Wrong About Microsoft
Editor's note: We're back with Top Stocks. If you missed our first issue last Friday, this is the new name, look, and feel for This Week on Wall Street.
In these pages – and with the accompanying video interviews – we're going to dive deep into the market's best stocks.
Last week, we covered Google parent Alphabet (GOOGL). Today, we're sticking with mega-cap tech companies... and highlighting Microsoft (MSFT).
As always, thank you for putting your trust in Stansberry Research and for joining us in this transition.
Our Top Stock this week is Microsoft... the 50-year-old tech giant out of Seattle.
Today's analysis is timely. Microsoft sits at the crux of the growing AI ecosystem. And investors need to know if it will thrive... or die.
On one hand, Microsoft appears perfectly positioned to benefit from AI. It runs cloud data centers, has invested in OpenAI, and puts AI tools like its Copilot digital assistant directly in front of everyday users.
On the other hand, investors worry that AI will make software businesses obsolete. That has already caused a huge collapse in Software as a Service ("SaaS") stocks.
Folks are calling it the "SaaSpocalypse." And Microsoft – a major seller of software – has been dragged down in the mix...
This is a situation where you need to understand the competitive advantages Microsoft has in the AI era... and whether or not its "moat" will hold for the next decade.
Microsoft has been one of the best stocks of all time. (Just ask subscribers to our Retirement Millionaire advisory... They're sitting on 15-year gains of 1,366% on MSFT as I write.)
The question now is if its incredible performance will continue...
Three Things to Know About Microsoft
The Microsoft You Think You Know Is Only the Tip of the Iceberg
Everyone knows Microsoft as the company behind the Windows operating system, Office suite, and Xbox gaming brand.
That's the stuff you see every day. But the "everyday" experience folks have with Microsoft is only a small part of its business.
Most folks don't realize that a bulk of Microsoft's revenue comes from selling software subscriptions.
In the old days, you could make a one-time payment to buy Windows, Office, or Xbox.
Now, it's all about subscribing to the Microsoft ecosystem.
Today, companies and other large institutions pay Microsoft monthly or annual fees for ongoing access to its software. That includes apps, cloud storage, and even gaming subscriptions.
The other part that investors don't see is that Microsoft is one of the biggest builders of data centers on the planet.
Walmart (WMT) runs on Microsoft's cloud. Most major banks run on Microsoft's cloud. When a company needs serious computing power – the kind that runs a global retail empire or a nationwide financial system – there's a very good chance Microsoft is powering it.
Its cloud business alone brings in $100 billion a year in revenue and is growing at 40% annually.
In short, Microsoft is providing the cloud-computing power that AI depends on... And unlike a lot of other companies in the AI race, it's actually profiting.
The Company Has Survived Existential Challenges Before
Right now, everyone is panicking that AI is going to kill Microsoft. The stock is down nearly 30% from its high. The headlines say software is dead.
But Microsoft has faced this sort of "disruptive innovation" before... and come out stronger.
In 2014, the conventional wisdom was that the rise of the cloud and SaaS would wipe Microsoft out. Back then, the company was a dinosaur. And the stock had gone nowhere for almost a decade.
Then, under CEO Satya Nadella, Microsoft fully pivoted to the cloud. It became one of the companies that built the cloud infrastructure everyone else needed.
Microsoft is similarly ahead in the AI era. It has invested billions of dollars into ChatGPT creator OpenAI. It has built the data centers that AI runs on. And it has even started charging for the AI features that are inside the Office products millions of people use every day.
Put simply, Microsoft has proved capable of handling whatever the AI era may bring.
Every Two Weeks, Millions of People Buy Microsoft Stock
Roughly 70 million Americans contribute to a 401(k) plan.
Most of them are in an S&P 500 index fund. And the way those funds work, the biggest companies get the most money – automatically, every single paycheck, whether the market is up or down, whether the news is good or bad.
That adds up to a relentless, unstoppable wave of money flowing into the biggest stocks in the S&P 500. That includes Apple (AAPL), Nvidia (NVDA), Amazon (AMZN)... and Microsoft.
There are trillions of dollars sitting in S&P 500 index funds today – and that number grows every two weeks, when folks get paid.
Some people call it the "relentless bid." That constant flow of money keeps coming in regardless. And it explains much of why the biggest stocks in the market keep outperforming and getting even bigger.
It can unwind in a panic... but it'd have to be a really big panic to reverse.
In other words, the winners will keep winning – and that includes Microsoft.
Watch to Learn More
To learn more about Microsoft, check out today's Top Stocks video. Bryan Beach and I dive further into its hidden data-center empire, its opportunities in the AI era, and the outlook for its stock.
You can watch the entire episode on our YouTube page by clicking the image above. Be sure to like and subscribe to get more of our videos.
Straight to the Source
- Microsoft's most recent earnings (presentation slides, transcript, and financials)
- Microsoft Ignite – a huge product demo day from November with tons of videos that look at the company's newest software tools and products
- Hit Refresh: Satya Nadella's (very good) 2019 book on Microsoft's transformation
Until next week,
Matt Weinschenk
Publisher and Director of Research
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