Things have always lined up against Microsoft, with all avenues leading back to the company’s taint as a leader in artificial intelligence and how that could impact the growth of its Azure cloud. We’ve known for some time that Microsoft’s AI assistant Copilot is a disappointment. While Alphabet’s Gemini, OpenAI’s ChatGPT, and Anthropic’s Claude are praised, Microsoft is roundly criticized. Last week, the cloud and software giant waved its flag and announced it was merging the teams working on the commercial and consumer versions of its flagship product. Melius Research analyst Ben Reitzes said in a Monday note summarizing Microsoft’s problems that Copolit’s restructuring certainly “doesn’t appear to be about consolidation.” Reitzes also explained how the strained relationship between Microsoft and OpenAI, which he rightfully called “the most important partner we’ve ever had,” is contributing to the challenge. According to Melius analysts, “OpenAI, which accounts for 45% of the Azure backlog, was supposed to share IP that would bring Microsoft closer to AI parity with Google.” He said IP sharing doesn’t seem to be helping Copilot very much, forcing Microsoft to spend more on research and development (R&D) than previously thought and use Azure’s computing power to train its own models. Azure capacity is already strained as a result of massive AI demand. Any compute that Microsoft doesn’t use is used to generate revenue from customers. If you use more Azure capacity internally, you risk allocating less to your customers and reducing your revenue. Management said that in conjunction with January revenue, Azure customer demand exceeded available supply. As a result, Microsoft’s year-over-year growth in revenue for Azure and other cloud services in the second quarter of fiscal 2026 fell to 39% from 40% in the previous quarter. The company’s forecast for the current quarter, to be released in about a month, was for 37% growth. Add all this to hiring freezes and layoffs at the very companies that would benefit from a better copilot, and you’re starting to see why Microsoft stock can’t maintain its momentum. In 2026, the stock price will fall by nearly 21%. We understand all of these concerns. Although we do not consider them to amount to an obituary as Melius has written here, the club has stuck with this name. MSFT YTD Mountain Microsoft YTD Reitzes is right when he says that Copilot’s run was disappointing. He’s also right that the partnership with OpenAI didn’t bring in the benefits he expected. Revenue growth and demonstration of strong monetization from the large amount of cash the company has piled up in AI research certainly hasn’t met our expectations. The lack of AI monetization tripped up the stock in January as investors were hoping for further revenue growth in the second quarter to justify a 66% year-over-year increase in capital spending. Melius kept his rating on Microsoft unchanged, but like his second rating, Reitzes left little room for optimism in his note. There appears to be more room for optimism. Microsoft is more than just a company going through difficult times. The company is one of the largest and most successful companies of all time. More importantly, the company has plenty of cash to spend on research and development and necessary acquisitions. We also have a strong management team. Sure, Copilot’s efforts may not be going well, but the reorganization announced last week is what you’d expect from a great management team. Being good doesn’t mean never making mistakes. This means that even if you make a mistake, you can recognize there is a problem, identify what it is, and adapt or pivot as necessary. Given the cash at Microsoft’s disposal and the long-term track record of its management team, Azure remains the second-largest cloud in the world, behind Amazon and ahead of Google Cloud. Microsoft also has Windows, which remains the primary enterprise operating system. We don’t think Microsoft should be excluded at this point. Last year, in the face of headwinds, we left Alphabet on March 31, 2025, but as the stock price rose immediately after we left, we lived with regret. The Club re-entered Alphabet on December 29, 2025. We’re not going to make the same mistake with Microsoft. GOOGL Mountain 2025-01-01 Alphabet from January 2025 To be clear, we are not making the decision to retain Microsoft based on our wishes, arguing that we must retain Microsoft because we unfairly launched Alphabet. After all, these companies have very different business models and approached AI in two very different ways. But we can’t deny that it influences our thinking. At Monday’s morning meeting, Jim Cramer said, “Did you know that it’s actually the ghost of Alphabet that keeps you from saying, ‘I got it, it’s over, I can’t resist?'” …You’re not dealing with a company without means. It’s an incredibly wealthy company. You are not dealing with a poorly managed company. This is one of the best management teams in all of S&P.” Jim’s explanation echoes that of Philip Fisher, who discussed the concept of “lucky because they have” and “lucky because they are capable” companies in his book Common Stocks and Uncommon Profits. The idea is that a “lucky and capable” company was one that was lucky enough to be in the right place at the right time and had a strong enough management team to take advantage of the opportunity. On the other hand, companies that are “lucky because they can” have the resources and know-how to make themselves lucky. Yes, companies can take advantage of opportunities, but more importantly, through financial means, good management, and sheer determination, companies can create opportunities themselves. Microsoft, like Alphabet, believes it falls into this second category. So, in hindsight, selling the former was a mistake, and I’m not looking at Alphabet as a reason to stick with Microsoft just because it’s always 20/20. Rather, it means that we recognize that Alphabet’s mistake was to give up on being a “lucky to be talented” company. Alphabet was also left on the street due to lack of execution by management and concerns that the company’s AI strategy wasn’t working well enough for other companies to overtake it. Interestingly, Microsoft-backed OpenAI was one of the other companies at the time. This shows how quickly the tide can turn when Wall Street senses weakness. Conclusion We’ve been here before. Remember the alphabet bard? Yes, most investors don’t either, and that’s the point. Companies that are “lucky because they are capable” like Microsoft and Alphabet (to be fair, this is true of most of the megacaps we own) can survive even if they fail here and there. Without seizing opportunities and risking failure, companies may not exist today. Alphabet turned the ship around and quickly reaped the rewards. I think it’s crazy to think that Microsoft can’t do the same thing. So even though it trades at 21 times forward earnings, the lowest valuation in nearly seven years, I don’t share the same level of bearishness as Melius’ Reitzes. He’s not necessarily wrong. We just think that just as owning Microsoft for the past five months was clearly wrong, selling now will likely prove just as wrong in a year. (Jim Cramer’s charitable trusts are long MSFT, AMZN, and GOOGL. See here for a complete list of stocks.) As a subscriber to Jim Cramer’s CNBC Investment Club, you will receive trade alerts before Jim makes a trade. After Jim sends a trade alert, he waits 45 minutes before buying or selling stocks in his charitable trust’s portfolio. If Jim talks about a stock on CNBC TV, he will issue a trade alert and then wait 72 hours before executing the trade. The above investment club information is subject to our Terms of Use and Privacy Policy, along with our disclaimer. No fiduciary duties or obligations exist or arise from your receipt of information provided in connection with the Investment Club. No specific results or benefits are guaranteed.
