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David Becker

The Microsoft Corporation (NASDAQ:MSFT) AI hype train has moved into full throttle as momentum buyers piled further into MSFT following its recent earnings release.

As such, MSFT is on track to re-test its April 2022 highs, as CEO Satya Nadella intensified the battle against his hyperscaler rivals, Google (GOOGL) (GOOG) and Amazon Web Services or AWS (AMZN) further.

Accordingly, Nadella is confident that "Azure has the most powerful AI infrastructure" in the market. As such, the company has seen significant growth in adoption by companies of its AI services over the past quarter.

Management highlighted that Azure OpenAI service has gained "more than 2,500 customers, up 10x quarter-over-quarter." As such, Microsoft's aggressive approach to winning the cloud computing battle through its generative AI infrastructure is gaining significant momentum.

Wall Street analysts are generally optimistic about Microsoft's approach. Wedbush sees Microsoft "to be leading the tech AI arms race." Microsoft has infused its AI advantage into its leading products, encouraging adoption and share gains

Microsoft's approach has been so successful that even Meta Platforms (META) CEO Mark Zuckerberg declared recently that he "expects generative AI to have an impact on every one of Meta's apps and services."

Hence, we aren't surprised that momentum buyers have rushed into MSFT, seeing the potential for a decisive breakout that could bolster its recovery further.

Notably, Microsoft's successful partnership with OpenAI has forced Google to combine DeepMind and Google Brain into a single unit, codenamed: Google DeepMind.

DeepMind CEO Demis Hassabis is reportedly close to Google co-founder Larry Page, as DeepMind has regularly fought for independence and against interference from Google management.

Therefore, Google's AI reorganization has demonstrated that Google has likely lost the initiative to Microsoft due to its "intense rivalry" in furthering its AI ambitions. As Stratechery's Ben Thompson aptly articulated:

Google's AI dynamics are challenging because the company is mainly trying to protect its position. Microsoft is focused on future gains, while Google is focused on potential losses. - Stratechery

The Redmond-based Microsoft is also moving toward monetizing its AI services, as analysts parsed the revenue uplift from its leadership against its arch-rivals.

Management accentuated that the company is looking to "increasingly monetize" its copilot, embedded across its tech stack. As such, Microsoft focuses on adding "a lot of value and productivity improvement," proving the use cases for its customers as they optimize their spending.

Hence, Microsoft is astutely using its AI tools to help its customers consolidate their cloud spending and vendors. Moreover, Microsoft has an ace up its sleeve, as a former leading AWS executive was reportedly no longer bound by his non-compete agreement with Amazon.

Insider reported recently that Charlie Bell (rumored to have lost the AWS CEO role to Adam Selipsky) is ready to be "unleashed" by Microsoft against Amazon.

Bell brought on his Amazonian culture to help improve Microsoft's cybersecurity product development cadence. Accordingly, Insider reported Bell was instrumental in developing Security Copilot, "which took only a matter of months to go from idea to launch, a much faster timetable than is typical at Microsoft."

Little wonder Nadella seems satisfied with the advantage that Microsoft is gaining in its security segment, helping the company to gain momentum amid the current vendor consolidation.

As such, Nadella highlighted that Microsoft "once again took share across all major categories," demonstrating the company's solid execution.

MSFT quant factor ratings (Seeking Alpha)

As a result of the post-earnings surge, MSFT's valuation is looking increasingly unattractive.

Seeking Alpha Quant reflected an F grade for MSFT, the worst possible. Hence, investors who didn't buy MSFT at its peak pessimism levels previously shouldn't jump on board now.

We also assessed that MSFT's price action looks highly unconstructive now, as momentum buyers are looking greedy, going into FOMO mode.

With that in mind, dip buyers are encouraged to continue staying on the sidelines and ignore chasing the upward surge.

Rating: Hold (Reiterated).

Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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Microsoft: Brace For Pain As FOMO Buyers Rushed In (NASDAQ ... - Seeking Alpha