David Wagner on MSFT Moat Adding AI Momentum, Azure Backing CapEx Story

deeper into our tech spotlight and we're spotlighting Microsoft today. The stock is up more than 20% since reporting earnings in late July. Joining me right now, David Wagner, head of equities and portfolio manager, Aptus Capital Advisors. Thank you so much for being with us. Microsoft, a name that is certainly given its shareholders a nice return over many, many years as people look back in time at this point. Now, we've seen it really come up after the earnings and there's still a lot of growth potential. What are your thoughts on the Microsoft moves that we've seen since earnings? Yeah. Nicole thanks for having me back here. I don't just like Microsoft. I love it here. And I'm bullish on the Microsoft story because of the AI narrative around it. We know that the stock has struggled a little bit this year given it's been basket in the software area, which has definitely been hit for the majority part of the year except for the last month. But you know, the narrative, it's not just a story anymore. It's not just a narrative anymore. Like you're starting to see stuff really show up in the numbers here. Nicole. I mean, Azure growth is increasingly AI driven. Copilot is monetizing across their entire software stack on a per seat basis. And that CapEx everyone's worried about, you know, especially in regards to how it's being funded, but it's being funded by one of the strongest free cash flow engines in the market right now, not specifically or only debt. And you add in generally a diversified business model. Nicole, you know, you have cloud, you have, you know, productivity software, gaming, LinkedIn, you know, YouTube, and you've got multiple growth levers with those aspects of the business working all at once. And I think at current levels, you know, I think Microsoft and honestly, mostly all the hyperscalers, Nicole, look very cheaply priced given the growth that they're actually delivering on, not just promising, as you mentioned, Microsoft Azure and my inside AI piece that I do daily, we talked about meta actually. Now turning to Microsoft for exactly that. In fact, spending hundreds of millions of dollars to have access to the AI models through Microsoft's Azure cloud platform. And they're not alone. Is that the kind of thing that continues to drive this company? And how long for how long? Yeah, I mean, that's a great point because I get asked, you know, that question all the time. Nicole, is Microsoft lagging their peers? Because, I mean, it's like no secret that Microsoft may be behind peers right now, like raw model capability, but that's largely by choice because they have that platform to your point, Nicole, that meta wants. I mean, obviously on an independent coding, you know, side regarding their benchmarks, the models are doing the heavy lifting inside copilot are still really driven by OpenAI and Anthropic's models. And Microsoft does have its own, you know, MAI lineup that they launched back in April of this year, you know, well after rivals really had some, you know, multiple frontier generations out. But, you know, Nadella like frames this as very much intentional because Microsoft doesn't need m AI to top every leaderboard since, you know, it already reaches hundreds of millions of office and team seats. And that's the part that does the heavy lifting is that installed base of it's like 450 million commercial, 365 seats out there that no one can match. And that's why, you know, I think meta is very interested in this space because, Nicole, we've talked about this before. Like, I love anthropic, I love OpenAI, but like, if you look at meta, you look at Google, you look at Microsoft, like they actually have that platform that can connect the frontier models to the consumer themselves. And I think that's one part of the story for all of those names right there. That's very much being underpriced by the market right now and does something like its foundry as well as that, another part that continues to grow and help to build it to the next level. Yeah, I mean, no doubt there, I mean, I think that that's helping them really across the board here. It's like Microsoft is still my mind. It's running like this asset light model by touching into all those other different partners that they have. I mean, you saw really Apple catch a bid here lately because they have been more asset light. And I understand like the CapEx that Microsoft is spending, but I still think it's kind of an asset light model on how they're kind of having their hands in all the different cookie jars on utilizing everyone else's technology lycanthropic like open AI. And even on that foundry side you're speaking to. And so at this point now with the CapEx, you're comfortable with the CapEx because there's demand that goes along with it, and you see profitability and monetization. I mean, the stock right now today, we're looking at it at 480. What kind of potential in percentage terms or. I mean, if you say you love it, do you do you have some goals of where it could be headed? Or are you just really comfortable saying, you know, over six months or 12 months or two years, it's going to be higher than where it is now? Yeah, I think you could take it from both angles. Nicole there. I mean, they're trading at like 24 times forward earnings. You know, in our internal model here at Aptus we have a trader closing 2 to 2829 times just given the moat that they have. And then you can add on, you know, a kicker right there of the amount of earnings growth that they have. But I think the big topic here is to the point that you made on earlier on that question, right there is in regard to like the narrative around the stock, and it's all driven by CapEx. And I think like the CapEx debate really misses something important. Like we're not talking about, you know, speculative spending anymore. You know, we're talking about a return on investment that's already showing up in this name to continue to drive that narrative. I mean, Azure's revenue growth is being directly driven by AI workloads, and that's coming straight from the company. Disclosures like not analysts guesswork. I mean, copilot has become a real monetization engine for the company that's already layered in like Mike or I miss GitHub dynamics, you know, as a per seat add on that the enterprises are actually paying up for today. So I think you can have that narrative behind the stock right now. And the kicker is the valuation and the growth of the stock. And that gets me interested not just for the next six months, but for the next one, two and three years. All right. Well, I'm so glad to be with you and have you explain all