Investors’ selling Microsoft stock to fund flashier AI picks won’t last forever
Microsoft is getting left behind as investors rotate into hotter artificial intelligence stocks. Jim Cramer says this dynamic won’t last forever. “I still own it for the Trust,” Jim said on CNBC on Wednesday, referring to his Charitable Trust , which is the portfolio used by the Investing Club. Jim’s reason to keep the Microsoft position: “I just don’t think that they’re going to sit there and let this happen.” Microsoft has become what Jim calls a “real source of funds,” meaning a stock that portfolio managers and investors are selling to raise the funds to buy other stocks tied to the AI data center boom, which are perceived to offer greater upside. “[Microsoft] has so much that can be considered compute AI, but it has a whole other line of business that people just think is going to be disrupted so aggressively [by AI],” Jim said. That “other line of business,” and a major driver of the stock’s 14.5% year-to-date decline, is Microsoft’s exposure to enterprise software. The enterprise software group, including fellow Club stock Salesforce , has been crushed this year on worries that code-writing from AI startups like Anthropic is so good that businesses could create their own software, and that efficiencies realized from AI assistants, such as Microsoft’s Copilot, could lead to further workforce reductions and the need for fewer per-seat software licenses. In its latest quarter, reported last week, Microsoft’s Productivity and Business Processes unit did show a better-than-expected 16% revenue increase to $35.01 billion. But the legacy segment — housing Office, Microsoft 365, LinkedIn, and business management software Dynamics — was still the biggest. Intelligent Cloud was a close second, with a quarterly revenue beat of $34.68 billion, but almost double the growth rate. The centerpiece of the cloud unit is Azure, the No. 2 cloud behind Amazon Web Services (AWS) and Alphabet ‘s Google Cloud. While Azure is certainly the crown jewel of Microsoft’s portfolio, there are worries that it is too reliant on the company’s fading relationship with OpenAI. Skepticism has also mounted about the quality and the capability of Copilot compared to OpenAI’s ChatGPT, Anthropic’s Claude, and Google’s Gemini. None of these issues seems insurmountable, Jim said. But he stressed that time is of the essence. “Microsoft better figure out what to do about its seat business soon, and at the same time answer some objections about Copilot.” The Club still has a hold-equivalent 2 rating on Microsoft stock and a $500 per share price target. MSFT YTD mountain Microsoft YTD Goldman Sachs is more bullish on Microsoft, calling the company its preferred software investment. The analysts said that feedback for Copilot has improved, and they expect acceleration in Microsoft 365 following recent upgrades. Goldman has a buy rating on Microsoft stock and a price target of $610. On last week’s earnings call, Microsoft CEO Satya Nadella talked up Copilot as an engine for software growth. “Quarter-over-quarter, we continue to see acceleration and now have over 20 million Microsoft 365 Copilot paid seats. The number of customers with over 50,000 seats quadrupled year-over-year, and Accenture now has over 740,000 seats, our largest Copilot win to date. And Bayer, Johnson & Johnson , Mercedes, and Roche all committed to 90,000 or more seats,” Nadella said. Overall, Microsoft put forth a better-than-expected quarter last Wednesday, delivering a robust forecast for its Azure cloud business. Microsoft projected cloud growth between 39% and 40%, beating the 37% estimates and exceeding the reported quarter’s almost 30% growth. The Street, however, was more interested in capital expenditure outlooks, and Microsoft’s roughly $190 billion guide on top of its other challenges led to a weekly loss. Jim did not recommend Microsoft as a buying opportunity when it slid 4% last Thursday, the day after a busy earnings night that included quarterly results from Alphabet, Amazon , and Meta Platforms . At the time, Jim ranked Microsoft third after Alphabet and Amazon, whose capex outlook hikes were applauded by the market. He put Meta last. As the odd man out, Meta does not have a public cloud, and its capex increase was frowned upon by investors. During Wednesday’s Morning Meeting, Jim reiterated last week’s sentiments. “I am so glad that we own Amazon and Alphabet,” neglecting to mention Microsoft or Meta. (Jim Cramer’s Charitable Trust is long AMZN, GOOGL, META, JNJ, and MSFT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
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