Microsoft Is Overvalued
Sure, Microsoft (ticker: MSFT) is not wildly overvalued like a number of other names, yet the Redmond Software giant’s stock is pricey at approximately 24x trailing Cash From Operations. That’s a hefty multiple for a company that is not growing Cash From Operations and is primarily growing revenue because of price increases (MSFT will have less pricing leverage in FY 2024) and acquisitions. Closing the Activision deal next week won’t do much to make MSFT’s valuation look more attractive.
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I admire what Microsoft is building both on the Software side (including the Azure business which will drive Microsoft over the next 50 years) as well as the Content business MSFT has built around the Xbox platform (content: Bethesda Games and Activision acquisitions). MSFT is a content heavyweight, right up there with Disney and WarnerBros. Microsoft is certainly larger than Apple, Netflix, Amazon and YouTube from a proprietary content perspective. Yet this doesn’t change the fact that MSFT shares are overvalued. Organic revenue growth will slow this fiscal year and cash flows will decline as MSFT invests in Large Language Models to build out its Gen AI business which won’t pay dividends in the near-to-intermediate term. The way I think about Gen AI is that it is table stakes for MSFT’s Azure business as it competes with GCP (Google is the AI leader) and AWS.
The real Gen AI winners will be companies that get creative and build Gen AI-infused apps and services that deliver a real ROI. On the Enterprise side this means that companies will need to get their enterprise data ready such that it may be incorporated into Gen AI data queries run by business users.
The way I think about Gen AI’s value add is that it will empower business users by providing them with next-level insights available on the other side of a simple natural language query. Imagine asking a Bloomberg terminal to visually represent your portfolio holdings and up pops an augmented reality display that includes live performance figures overlayed with risk factors, financial metrics at the holding level, news and more along with the AI’s recommendation on how to recalibrate the portfolio combined with the ability to execute the trades in real time that would complete the recalibration.
Imagine a medical researcher that is able to run a sophisticated query against tens of millions of medical records with a simple natural language command. The number of use cases is only limited by user creativity.
This reality is not around the corner. In the meantime, MSFT shares are expensive.