Notes on Microsoft ($MSFT)
Barbarians at the gate?
Microsoft is probably the most well-known technology company in the world. It has dominated enterprise software for more than 40 years and has consistently reinvented itself through successive waves of technological change.
The Lost Decade
In 2013, Microsoft remained a dominant company, but it did not elicit excitement among investors or tech enthusiasts. In fact, it was what investors call a ‘value trap’. Microsoft missed the internet wave, and its mobile efforts were unsuccessful as well. A newer crop of technology giants had surpassed Microsoft in innovation. Its stock price was $37 per share at the end of 2013, still below its peak of $58 per share in 2000. Microsoft shareholders had just experienced a lost decade.
The internal culture had become bureaucratic, and change was much needed. It came in the form of Satya Nadella, who became the CEO in 2014. He realised that Windows was no longer the centre of the universe and pivoted the company’s focus towards Azure, Microsoft’s cloud platform.
He brought in a culture of openness and collaboration. Whereas previously Microsoft tried to sell everyone on the Windows phone, they now made sure their best software, Microsoft Office, was available on iPhones and Android devices. He joined the open-source community and even acquired GitHub, signalling to developers that Microsoft would lower its walled gardens.
Since 2013, Microsoft’s stock has been up 10x. Satya has been a runaway success. Few would have imagined such success for Microsoft when he joined in 2013.
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The AI Bet
In 2026, Satya Nadella faces his toughest challenge yet. In 2023, Microsoft was off to a great start with generative AI. They bought a material stake in OpenAI and leapfrogged their rivals to become the face of AI. They integrated AI into their search engine, Bing, and there were rumours that they were taking market share from Google.
Fast forward to today, and Microsoft is struggling with low adoption of its AI products. While Microsoft has pushed Microsoft Copilot (an AI assistant integrated across Microsoft 365 apps, Windows, and web browsers to boost productivity) to 150 million users, the value remains unproven.
Moreover, the cloud business is transitioning to a capital-intensive model. Amazon and Google are guiding to nearly $200B of CapEx (each!) in 2026, with Microsoft’s trajectory pointing towards >$150B in CapEx. Investors are rightfully worried about the return on this investment, causing Microsoft’s stock to fall ~10% following its latest earnings call.
