Microsoft: Backdated Azure Growth And Pricing Discounts Make The Stock Less Attractive

Summary:

• My bullish thesis on Microsoft hasn’t played out well, with Azure growth and ARPU pricing tailwinds not meeting expectations.
• Azure faces supply constraints and likely market share loss, and MSFT’s custom AI chip development lags behind competitors, which can impact longer-term supply chain efficiency and higher costs.
• Recent pricing discounts on Azure OpenAI API and Copilot may pressure gross margins.
• 1-yr fwd PE valuations are near peak levels, trading at a 64% discount vs longer-term averages. I think this is too high for comfort for buys on the stock.
• Relative technicals are resting at support and are likely to consolidate first before rising up. And the removal of a clause barring MSFT from using OpenAI’s AGI-level technology for commercial purposes is a key upside risk to monitor.

Performance Assessment

My last ‘Buy’ stance on Microsoft (NASDAQ:MSFT) (NEOE:MSFT:CA) has not played out well as the stock has lagged the S&P 500 (SPY) (SPX) (IVV) (VOO):

Thesis

My bullish thesis was focused on Azure

Analyst’s Disclosure: I/we have a beneficial long position in the shares of VOO, AMZN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.