r/valueinvesting
Here's the (actual) Bear Case for Microsoft:
The author breaks down the bear case for Microsoft across Azure, Office 365, and Windows, highlighting AI risks and competitive threats.
- Author considers Microsoft a value stock that will continue to grow.
- Azure growth relies heavily on OpenAI and internal compute needs are cannibalizing customer growth.
- AI threatens the stable per-user subscription model of Microsoft 365, exposing it to usage-based competition.
- Windows is a declining business facing hardware limitations, Mac competition, and substitution by mobile devices.
To be clear, I think Microsoft will continue growing and I consider it a value stock. I am simply getting sick of seeing 10 Microsoft posts a day, with most of them containing misinformation.
I'll explain the bear case by going down each of their 3 key businesses:
- Azure. The growth is great, but with the caveat that it's likely largely tied to OpenAI Capex. Another risk is that because Microsoft themselves also need compute, they've sacrificed Azure growth for themselves. Not only does that hurt MSFT in the short term, but it also annoys clients. AWS does not have this problem. Google Cloud does, but is also cheaper.
TLDR: 8/10 business, but their growth is very dependent on the success of OpenAI.
- Microsoft 365 / Office. This business is great because companies pay per user, per month. The stability is what enterprise specifically loves about it. It's why Teams beat Slack despite being the inferior product. The problem is that AI threatens to upend this model.
If everyone is using different amounts of compute, you may need to introduce a usage-based pricing model. The issue with that is if an enterprise is paying for marginal usage, then Anthropic and OpenAI (or others) can directly out-compete Microsoft in this area.
TLDR: 6/10 business. A cash cow today, but AI can disrupt this business model.
- Windows. This one is just bad. Memory is crushing lower-end PCs, Windows has a quality problem to compete in higher price segments against the Mac. Also, tablets and phones are replacing computer needs, and Microsoft is even less relevant there too.
TLDR 1/10 business. No longer a growth engine.
People on this subreddit compare Microsoft today to where Google was last year. But I should note there's considerable differences: Search was threatened by AI, it was a legitimate threat to their cash cow margins. They escaped it by creating a top notch model (Gemini) to fuel search results, and via their TPU investments. Microsoft does not have a custom AI model. They do not have custom chips to make Azure cheaper than GC or AWS. They do not have a large ad based consumer software product where AI can directly improve margins.
Look at Amazon's past 5 year growth outlook. There's no law saying Microsoft won't have the same fate - slow and steady growth, comparable to an index fund.
Sigh. Read point 2 again. A integrated stack yes, but the key lever there is their flat fee business model. AI usage directly upends that. How can a flat fee work when some will spend $100 on Claude for Excel and others zero?
And once you move away from flat fee, and to monetization by usage, suddenly the “moat” falls apart. Because in this world, quality matters much more. If enterprise needs to pay by usage, the most effective/efficient apps are now the cheapest. And that won’t always be a Microsoft app.
You’re assuming the average Office user will generate enough AI usage to break a flat-fee model. I don’t see that happening. Most enterprise users will only make a handful of AI requests per day, which is exactly the kind of workload SaaS pricing has always been able to absorb through cross-subsidization and tiered licensing. Even if that wouldn‘t be the case , they can implement usage limits.
Yeah, the bear case is that AI gets good enough that it breaks the flat fee model, which by the way has already started to break.
But if you think AI usage will remain mediocre in enterprise, then I guess we will agree to disagree.
If AI gets better companies will need less staff which means less licenses needed in theory.
Imo ai can cut 10-20% of crap. There's a lot of people preparing slide shows and other nonsense as a full time job which can be done in a fraction of the time with AI
Someone’s scared stock is going up and their puts won’t print. I see these articles all the time when a stock goes in one direction someone writes on how it should go the other. Look at the fundamentals and returns… very simple.
It's a screaming buy here sub 400
I have an overall bullish view. But few risks that I am watching are: 1) Azure revenue growth 2) CapEx as a percent of Operating Cash.
If Azure growth accelerates while CapEx begins to moderate, it would indicate AI infra investment is converting into a durable revenue for longterm. It would also mean that the recent FCF compression is temporary rather than structural.
Tired of Europe being against freedom , we need to give their citizens some democracy !
TBF, Microsoft popped 6% today. OpenAI's IPO delay might've had some affect but who knows. Today was also a big day for indices to re-balance so hard to tell what actually happened.
A simple AI search would invalidate half of these points. It’s an understatement to say that M365 and Windows are deeply ingrained in enterprises.
I work for a big European company, Microsoft is not going anywhere
There is always a case for bear view on Microsoft, but the strength of the ecosystem is unbeatable especially in enterprise. In Enterprise they have been killing it - no one comes close to that. Also the company has such a instinct to survive pivot and dominate - they have done it a few times in history, and have good chances to be there now.
They have incredible talent including in AI (Mustafa Suleyman co founder of Deepmind) - who is developing their internal model (recipe of development is not hard to get, even Grok got somewhere) - they have huge amount of enterprise data on their cloud, just waiting to be used. The integration of these services is just incredible what can be achieved from one single vendor. They have the cloud, they have applications, they dont have yet the model, they dont have a chip (google is probably better here).
That’s the point though. Microsoft isn’t a consumer growth story. Enterprise IT budgets drive the business, not private Office users.
I’m not even sure how one would apply a usage based Office model, which is what it looks like you’re saying.
Do I pay more if I get more emails? If I’m active in excel more often than normal? What does usage based Office even look like?
Again, if you are referring to CLOUD and NOT OFFICE, it’s already usage based pricing.
On deepseek, this has nothing to do with their own models. It’s the same as Claude and Anthropic. It seems you are still not aware that Copilot “rents” models from Anthropic and OpenAI. Deepseek will now be an option as well within copilot. This has nothing effect or relationship to their own models.
Yes memory will likely pose an issue, but (even still) memory is cyclical and will come back down. I do think the floor is permanently raised, but it will still go through cyclical cycles.
The best argument against MSFT is that their products suck and their customer base hates them