Rob Tetrault, BA, JD, MBA, CIMMicrosoft CorpMSFTHOLDSep 21, 2018

Since reporting last week, they've rallied almost 130 points. MSFT is at the epicenter of the software (SAAS) socks and ultimately is where you'll make money as these models as these models commoditize. MSFT said, this capex spending is here to stay, but software isn't going away. She didn't sell it before earnings (it had been lagging all year), because she firmly believed in the CEO who did a great job of reading the room, of not doing what Google's doing. They said they will have free cash flow and won't go to the debt market (MSFT and JNJ are the only triple-A companies). Cloud revenue beat and guided upward. Still gotta see what they're spending on capex, but they're monetizing cloud. People are looking at this in a new light as it is re-rated.

He had covered calls until their report last week blew it out of the water, exceeding anything he could dream of. So, he wrote a $530 call which expires in a couple weeks. He's harvesting some volatility without any loss of conviction in the name.

Was the most impressive stock this quarter. He was pounding the table on it before the quarter. It's not a software stock, but a utility. Everyone uses their products every day. MSFT has Co-Pilot, LinkedIn, Word, Teams and more. Operating margins are huge, still robust. Balance sheet is solid. Their RPO is north of 650 billion. Great managers. But the stock has run up a lot so mind the gap with the valuation.

They just reported a blow-out quarter. Despite massive AI spending, MSFT is cash-flow positive and are integrating their AI into their software. ALso, their cloud business is on fire. It continues to rise in a straight line.

Was up 24.6% last month, mostly after its blow-out quarter last week. Great numbers on Co-Pilot use and MSFT has controlled spending. He owns a large position.

Earnings tonight. Bought for the first time ever this year when down 35%. It'll be a beneficiary of AI, won't be one of those that get slaughtered.

They reported a clean top and bottom line beat today and he thinks it can bounce, They reported a big earnings beat and Azure's growth accelerated to 43%, the fastest pace in 4 years. Free cash flow was positive. They're spending big on data centres, but not spending beyond their means. Their Co-Pilot reached 30 million paid users up from 20 million just three months ago.

Overall, he's interested in its (and other hyperscalers') AI/cloud infrastructure and capex. In particular, this is a stock that hit $400 more than 2 years ago and has gone sideways ever since. 

Software and spending concerns are problems. What will OpenAI do for MSFT? But if quantum computing happens, MSFT is one of the three hyperscalers who will take advantage. Google and MSFT have produced chips for quantum computing; MSFT's chip is self-cooling, which extends their lifetime. MSFT is volatile, but he wants to add to his position.

Buy it, put it away for 10 years, do very well. Suffering from software outflows from large ETFs. Revenue still growing in teens, even better on EPS. Investing a lot in capacity (but they can afford it), which customers have signed onto for the next several years. Trades at 20x PE, yet nothing's really changed.

He fears bad news about Copilot, weaker-than-expected Azure numbers and software worries in the face of Anthropic developing its own software. But an analyst points to strength in their AI business, solid growth in sales, including Azure. Let it run, and don't sell.

Trade it. Has a great base around $370. Now, it's bouncing above support again. His target sell price is $440-450. It could possibly reach $500 though.

Dragged lower on fears that AI will destroy its business model. Putting AI solutions into products, and that will drive upside. His firm deals in 3-5 year holds (if something's broken, they sell). A multi-year grind higher. Yield is 0.94%.

Three durable growth engines:  Azure, enterprise software, AI monetization. Key is that it keeps turning its installed base into higher-value subscriptions and usage-based revenue, while preserving margins and cash generation. Market's concerned that margins and cash will be pressured as Gen AI gets rolled out through competitors.

Azure remains the clearest growth driver. Key competitive advantage with enterprise software is that one stack bundles infrastructure, security, identity, and data/productivity tools. Raises costs to switch, which provides pricing power. Yield is 0.93%.