Microsoft & The Algorithm

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The software sector, you see, had a bit of a wobble. A tumble, really. Microsoft (MSFT 2.87%), along with ServiceNow and SAP, reported earnings. Not terrible, mind you, just…less exuberant than some had hoped. So it goes. The iShares Expanded Tech-Software ETF, which is a fancy way of saying a basket of cloud software companies, lost about 5% recently. And is down 13% from late January. A perfectly reasonable amount of panic, considering.

Investors are worried, you see, that Artificial Intelligence will make all this cloud software… unnecessary. Like buggy whips after the automobile. The idea is companies will build their own tools, in-house, using AI, and won’t need to pay subscriptions anymore. A sensible fear, perhaps. Though, humans being humans, they’ll probably find a way to mess it up anyway.

These software-as-a-service companies, they’ve been living large. Trading at high multiples, spending money like it grows on trees. Reporting losses, even. It’s a beautiful system, really. Until it isn’t. Microsoft, though, is different. It’s the most diversified of the so-called “Magnificent Seven.” Down 26% from its peak, which is a significant drop, but somehow… less surprising than most.

What the Numbers Say

Microsoft’s latest earnings report? It didn’t explain the 25% plunge, the trillion-dollar wipeout in market cap. Numbers rarely explain anything, if you think about it. Revenue was up 17%, to $81.3 billion. Azure, their cloud platform, grew 39%. Earnings per share rose 24%. All good numbers. All ignored, because people prefer a story to a spreadsheet.

The problem, apparently, was capital expenditures. Up 66%, to $37.5 billion. Spending money to make money. A classic paradox. This ate into free cash flow, sparking fears they were overspending on AI infrastructure – those fleeting, expensive chips. Management says demand exceeds supply, which means they’re confident someone will pay for all this. A comforting thought, perhaps. Azure, the core of their AI business, is growing fast, with high margins. Another quarter of 37-38% growth is expected.

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Microsoft’s Cheat Code

The sell-off, you see, is based on the idea that “vibe-coding” – creating applications with AI prompts instead of traditional coding – will disrupt the cloud software industry. AI start-ups like OpenAI and Anthropic will win, and the established players will lose. A simple narrative. Humans love simple narratives.

If that happens, it means those AI tools are valuable. Which is logical. And that value should translate into profits. Good news for Microsoft, because they own 27% of OpenAI. Worth $135 billion currently. And Amazon is talking about a $50 billion investment. Nvidia, too. It’s a bit like watching a very expensive game of poker. So it goes.

Microsoft also has a stake in Anthropic, having committed up to $5 billion. And they’re seeing business scale up. Anthropic contributed to 23% growth in commercial bookings. Microsoft now has $625 billion in commercial remaining performance obligations. OpenAI accounts for 45% of that, leaving $350 billion from other companies. A substantial sum, even for a large corporation.

Some investors are disappointed with Microsoft’s Copilot, their own AI product. But Microsoft has more ways to win from AI than most. Enterprise software, cloud infrastructure, the Github coding platform, a major stake in OpenAI, and now a relationship with Anthropic. A diversified portfolio. A sensible strategy, really.

The stock trades at a price-to-earnings ratio of 25. Cheaper than the S&P 500. Revenue is growing in the high teens. Visible runway to double-digit growth for several quarters. A reasonable expectation, given the circumstances.

After the recent sell-off, Microsoft looks… less bad than most. A strong buy? Perhaps. But remember, the market is a fickle beast. And humans, well, we’re all just trying to get by. So it goes.

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2026-02-04 08:53