David Wagner on MSFT Moat Adding AI Momentum, Azure Backing CapEx Story

**SPEAKER_1** (0:00)
The stock is up more than 20 percent since reporting earnings in late July. Joining me right now, David Wagner, head of equities and portfolio manager, Aptus Capital Advisors. Thank you so much for being with us. Microsoft, a name that has certainly given its shareholders a nice return over many, many years as people look back in time. At this point now, we've seen it really come up after the earnings, and there's still a lot of growth potential. What are your thoughts on the Microsoft moves that we've seen since earnings?

**David Wagner** (0:29)
Yeah, Nicole, thanks for having me back here. I don't just like Microsoft, I love it here, and I'm bullish on the Microsoft story because of the AI narrative around it. We know that the stock has struggled a little bit this year given it's been basketized in the software area, which has definitely been hit for the majority part of the year except for the last month. But the narrative, it's not just a story anymore, it's not just a narrative anymore. You're starting to see stuff really show up in the numbers here, Nicole. I mean, Azure growth is increasingly AI driven, Co-pilot is monetizing across their entire software stack on a per-seat basis and that CapEx everyone's worried about, especially in regards to how it's being funded. But it's being funded by one of the strongest free cash flow engines in the market right now, not specifically or only debt. You add in generally a diversified business model, Nicole. You have Cloud, you have productivity software, gaming, LinkedIn, YouTube, and you've got multiple growth levers with those aspects of the business working all at once. I think at current levels, I think Microsoft and honestly, mostly all the hyperscalers, and Nicole, look very cheaply priced given the growth that they're actually delivering on, not just promising.

**SPEAKER_1** (1:42)
As you mentioned, Microsoft, Azure and my inside AI piece that I do daily, we talked about meta actually now turning to Microsoft for exactly that. In fact, spending hundreds of millions of dollars to have access to the AI models through Microsoft's Azure Cloud Platform. They're not alone. Is that the kind of thing that continues to drive this company, and for how long?

**David Wagner** (2:09)
That's a great point because I get asked that question all the time, Nicole, is Microsoft lagging their peers? Because it's like no secret that Microsoft may be behind peers right now like raw model capability, but that's largely by choice because they have that platform to your point, Nicole, that Meadow wants.
Obviously, on an independent coding side regarding their benchmarks, the models are doing the heavy lifting inside co-pilot are still really driven by OpenAI and Anthropics models. Microsoft does have its own MAI lineup that they launched back in April of this year, well after Rivals really had some multiple frontier generations out. But Nadella frames this as very much intentional because Microsoft doesn't need MAI to top every leaderboard since it already reaches hundreds of millions of office and team seats, and that's the part that does the heavy lifting is that installed base of it's like 450 million commercial 365 seats out there that no one can match. That's why I think Meadow is very interested in this space. Because Nicole, we've talked about this before. I love Anthropic, I love OpenAI, but if you look at Meta, you look at Google, you look at Microsoft, they actually have that platform that can connect the frontier models to the consumer themselves. I think that's one part of the story for all of those names right there, that's very much being underpriced by the market right now.

**SPEAKER_1** (3:34)
Is something like it's foundry as well as that another part that continues to grow and help to build it to the next level?

**David Wagner** (3:43)
Yeah, no doubt there. And I think that's helping them really across the board here. It's like Microsoft in still my mind, it's running like this asset light model by touching into all those other different partners that they have. I mean, you saw really Apple catch a bid here lately because they have been more asset light. And I understand like the CapEx that Microsoft is spending, but I still think it's kind of an asset light model on how they're kind of having their hands and all the different cookie jars on utilizing everyone else's technology, like Anthropix, like OpenAI, and even on that Founders side you're speaking to.

**SPEAKER_1** (4:15)
And so at this point now with the CapEx, you're comfortable with the CapEx because there's demand that goes along with it, and you see profitability and monetization. I mean, the stock right now, today we're looking at it at 480 What kind of potential in percentage terms or, I mean, if you say you love it, do you have some goals of where it could be headed or are you just really comfortable saying you know over six months or 12 months or two years, it's going to be higher than where it is now?