Microsoft Shows the Mag7 What AI Investment Looks Like

**Tyler Crowe** (0:02)
Two stocks diverge on an earnings day. Today, on Motley Fool Hidden Gems Investing.
Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by long-time Fool contributors, Lou Whiteman and Matt Frankel. It is the depths of earnings season, so we're gonna try to hit as many companies we can in what we would call a relatively short show that we have here. We're also gonna hit some earnings questions. And we wanna start with earnings, especially with the two Magnificent 7 companies that happened to report after the close yesterday, and that's Microsoft and Meta. And guys, there was some pretty large divergence between what the market thought of those results. As we're taping right now, shares of Meta are down about 8.8% while Microsoft is up a whopping 15%.
Now, last quarter and throughout the show, we have kind of discussed Meta's what is all this spending for question quite a bit. But what stands out to me, kind of in the stark contrast of these two earnings reports, is that Microsoft is the first major AI CapEx spending company to announce earnings and see a positive earnings reaction in the quarter. Is this just like a one-time blip, like, yeah, things look nice comparatively? Or is there some sort of through line here that shows Microsoft is doing the right thing while others, as we discussed previously, Alphabet and here with Meta, that they're making riskier bets?

**Matt Frankel** (1:28)
Yeah, I'm not at all surprised to see Microsoft spike like it is after earnings. I mean, it isn't the only major AI CapEx spender, like you said, to report solid earnings and accelerating growth in the right ways. I mean, Alphabet reported that Google Cloud revenue was accelerating as well and that stock fell right after earnings. Microsoft's Azure revenue accelerated to 43 percent growth in the first quarter, but it's also showing a clearly solid ROI on that CapEx you're mentioning, without having to constantly increase these eye-popping numbers. I mean, Microsoft actually trimmed, we haven't heard that word, trimmed its full year CapEx projection a little bit in this quarter. I mean, now it's an accounting change mostly related to how long they assume the useful life of their AI data centers are. But it's still like a welcome reduction in a sea of companies that just seem to not be able to announce enough spending.
Speaking of not being able to announce enough spending, Meta's story was kind of the opposite here. I mean, Meta missed estimates for profitability, kept its Q3 revenue guidance the same, and didn't do anything to reduce its CapEx forecast, which a lot of investors were kind of thinking they might.
It isn't showing investors yet that their money is being well spent. Now, to be totally fair, we've said before on these shows that Meta is great at one thing, social media advertising. That business is still growing very strong, but it's not what the bulk of their money is being spent on, and that's what's concerning people.

**Lou Whiteman** (2:58)
Right. The whole AI trade is basically suffering right now due to one question. And Microsoft did a better job of answering the market's biggest question than anybody else has.
It's really that simple. With Meta, the spending is continuing, the guidance for revenue is, but there is no answer to the question of when sales growth from all of the spending will emerge, or how this all ends with a rosier future. Where is the pot of gold? Microsoft, meanwhile, reminded the market of what a diversified business looks like. They saw strong software results, strong Azure AI expansion, real growth across the business. It isn't really about this quarter's business for any of these companies in the stock reaction. It's about the narrative about what the business will look like in two years due to all of this AI excitement and Microsoft just presented a much better clearer picture of the future and the market's rewarding it.

**Tyler Crowe** (3:56)
As we've been, we and other investors have been assessing the, we'll call it like the best of the cloud hyperscalers or the best investors in AI right now.
Microsoft has never, I haven't seen it really out in the lead. I think last year the big narrative was Google was winning the race, Apple was falling behind and in some various point, one company was doing the best or the other. But if we were to look at Microsoft stock prior to today's jump, basically before the market opened, its stock was more about the same as January of 2024 So it's been a up and down, but at the same time hasn't really done much in terms of performance for investors and some of that's with the concerns of CapEx. Some of it was that very question about ROI and stuff like that. But today, after this earnings report showing that, answering the question to your point, Lou, shares of Microsoft are trading about 25 times trailing earnings. Based on that, based on where the stock has gone and where it has positioned itself in this AI race, it kind of begs the question to me, is Microsoft now the best bargain stock among the Mag7 companies out there?