Microsoft Cuts Jobs as AI Takes Over

almost irrelevant. This was the growth engine before AI. If you remember, they just closed the Activision acquisition and they thought that gaming was the the the move to accelerate growth, but obviously since then every investment dollar now is going into the AI investment into building data centers. They can sell these data centers at a very big markup. Then the AI drives more infrastructure software sales. Then it drives more office sales with co-pilot. And so they have a just a much better place to invest right now. The gaming business doesn't really have much growth in it, so they might as well cut costs there in order to fund AI investment. >> Yeah. I mean, what you're describing Gil in a positive way certainly is a scenario that investors could buy into, but stock's down over 20% this year. Uh it's gotten penalized in part because it's not necessarily out there with a leading model and because it is a software company and conceivably, uh you know, maybe at the mercy of Anthropic and Open AI in terms of some important things it still sells to the enterprise. >> That's right. So there's two bear cases. We disagree with both and they're contradictory. One bear case is AI is so good that it's going to destroy all of software. Now a a careful look at what Microsoft does in terms of Windows and Office tells you that that's not going to happen. And most of their their software in addition to that is infrastructure software like Snowflake, like DataDog. You can see how well they're doing and Microsoft's doing that. The second bear case is is completely contradictory. It's AI is no good and therefore why are they investing so much in building data centers? And again, there it's clear that they are getting a return because they're accelerating growth at the same level of margins. So we disagree with both, but yeah, the narrative on Microsoft has turned very negative, but that's an opportunity because when they report in 3 weeks, they're going to report accelerating Azure growth, and they're going to report CapEx growth that it's at at a lower rate than that. So, Azure's going to grow from 40 to 41, 42% growth, and CapEx in next fiscal year is going to grow at a slower rate than that, which means cash flow acceleration. We think investors are going to like that. >> All right, so you see that as a moment then. I was going to ask, well, what's going to turn around that narrative? So, you're putting a lot of stake in terms of the earnings coming up in a few weeks. >> Yeah, that's exactly right. I mean, this is a pivotal earning season because everybody's going to be very tuned in to CapEx commentary. And we obviously don't know exactly what Microsoft, Amazon, Google are going to say, but it's very unlikely that they'll say, "Oh, this AI thing isn't working out. We're going to stop building data centers." What they're far more likely to do is say, "Look, we hear you. We understand concerns around cash flow and capital, and therefore we will grow CapEx next year, but maybe at a lower rate." And as it happens, Microsoft's the company that actually has a fiscal year in June, so their guidance will be for the next 12 months, which means investors will really focus on that. And as long as they deliver that healthy message, which is more CapEx but accelerating revenue growth, we think there'll be a relief for the whole AI trade, but most importantly,