Why Microsoft has a 'meaningful ways to run,' analyst discusses

Summary

In this episode of 'Goodbye or Goodbuy', host Tomas Tungo from Fury Ventures discusses the market potential of tech giants like Microsoft and Nvidia. Microsoft's AI capabilities and enterprise AI leadership are highlighted, with a focus on its rapid growth and strategic investments in data centers. Meanwhile, Nvidia's impressive performance is contrasted with the looming threat of increased competition in the AI chip market. The conversation also touches on the importance of software for Nvidia's future valuation and growth, offering a contrarian perspective on the company's stock.

Takeaways

• 📈 Microsoft is seen as a strong buy due to its leadership in AI, with a rapidly growing business in this sector.
• 💡 Microsoft's investment in data centers, to the tune of $15 billion a quarter, positions it well for the AI era.
• 🚀 Microsoft is gaining market share in cloud services, particularly against Amazon and Google.
• 🔄 There's a shift in startup preferences from Amazon to Microsoft for cloud services, due to AI capabilities.
• 🌐 Enterprise AI is a significant strength for Microsoft, with cross-selling opportunities across various products.
• 📊 Microsoft supports a wide range of AI models, giving it access to diverse data for training and product development.
• 📉 Despite impressive growth, there are concerns about the sustainability of Nvidia's high profit margins due to increasing competition.
• 💼 Nvidia's success is challenged by competitors like Google, Amazon, and AMD developing their own AI chips.
• 📊 Nvidia's forward PE has historically spiked and then declined, suggesting that current valuations may not be sustainable long-term.
• 🛠️ Nvidia needs to diversify into software to maintain growth and justify its valuation as demand for GPUs potentially slows.
• ⏳ The time and complexity involved in producing competitive AI chips could delay the entry of new competitors to the market.

Q & A

What is the primary focus of the 'Goodbye or Hello' show?

The primary focus of the 'Goodbye or Hello' show is to help investors cut through the noise of the stock market and make informed decisions regarding their portfolio, with a particular focus on the most valuable public companies and their battle for the top market cap spot.

Why is Microsoft considered a good buy according to Tomas Tunguz?

Microsoft is considered a good buy due to its leadership in AI, having developed a five billion dollar run rate business in about 18 months, significant investments in data centers, and its ability to win market share from other cloud providers like Amazon and Google.

What is the significance of Microsoft's relationship with Open AI for its AI business?

Microsoft's relationship with Open AI is significant because it initially helped Microsoft to be at the forefront of AI development. This partnership, along with substantial investments in data centers, has allowed Microsoft to create a substantial AI business.

How does Microsoft's AI business growth compare to its competitors?

Microsoft's AI business has grown at an impressive rate, with a 700% year-over-year increase. It has been gaining market share in the cloud market, particularly from Amazon and Google.

What is the current trend among startups when it comes to choosing a platform for building their companies?

The current trend among startups is to build their companies on top of Microsoft because they want early access to AI features offered by Microsoft, particularly those on Azure.

What is the potential risk for Microsoft's partnership with Open AI according to the discussion?

The potential risk is that the partnership with Open AI might not last forever. Open AI is broadening its distribution and pushing more into a consumer search direction, which could lead to increased competition with Microsoft and challenge their key relationship.

Why is Tomas Tunguz avoiding Nvidia stock despite its impressive performance?

Tomas Tunguz is avoiding Nvidia stock due to the increasing competition in the AI and inference chip market, with companies like Google, Amazon, and AMD developing their own chips that could challenge Nvidia's dominance and potentially shrink its profit margins.

What is Nvidia's strategy to maintain its growth and profitability in the face of increasing competition?

Nvidia needs to diversify and get more into software to sustain its growth and profitability. The company is already selling a suite including chips and software, but it needs to increase the software component of its revenue to boost its valuation.

How does the historical PE ratio of Nvidia reflect its growth phases?

Nvidia's historical PE ratio has seen spikes above 50 during its major growth phases, such as gaming, crypto, and AI waves. After each peak, the PE ratio has fallen to around 25, indicating a potential pattern of high valuation followed by correction.

What is the potential long-term challenge for Nvidia's competitors in the chip manufacturing industry?

The long-term challenge for Nvidia's competitors is the time and resources required to establish and ramp up fabrication facilities for chip manufacturing. The U.S. has limited ability to fabricate chips, and it will take a significant investment and time to catch up.

What is Tomas Tunguz's current position in Microsoft and Nvidia stocks?

Tomas Tunguz holds Microsoft as his single largest public position, while he has a very small position in Nvidia.

Outlines

00:00

🤖 Microsoft's AI Dominance and Growth Potential

The first paragraph discusses Microsoft's significant position in the AI market, emphasizing its rapid development of a $5 billion business in just 18 months. Microsoft's partnership with OpenAI and substantial investment in data centers are highlighted as key factors contributing to its success. The company's strategy of winning market share from competitors like Amazon and Google is underscored, along with the shift in startup preferences from Amazon to Microsoft for AI capabilities. The potential for further growth is identified, with only a fraction of Microsoft's customers fully utilizing their AI offerings, suggesting that there's substantial room for expansion. However, the risk of competition from OpenAI's broadening distribution and potential divergence in strategic direction is noted as a potential challenge for Microsoft's future in AI.

05:00

📉 Concerns Over Nvidia's Future Amid Growing Competition

The second paragraph focuses on Nvidia's remarkable financial performance, with a revenue increase by 5 times and profitability growth from $4 billion to $46 billion in four years, primarily driven by AI and inference capabilities. However, the discussion shifts to the intensifying competition Nvidia faces from companies like Google, Amazon, and AMD, which are developing their own chips to rival Nvidia's dominance. The inflated profit margins due to price increases are identified as unsustainable in the long term, with the expectation that competition will lead to shrinking margins. The paragraph also addresses the valuation concerns, noting Nvidia's historical PE spikes and subsequent declines, and the need for the company to transition more into software to sustain its growth and valuation. The potential for competition to materialize more slowly than expected due to manufacturing challenges in the chip industry is presented as a positive outlook for Nvidia.

Keywords

💡AI (Artificial Intelligence)

AI refers to the simulation of human intelligence in machines that are programmed to think like humans and mimic their actions. In the context of the video, AI is a driving factor behind the growth and valuation of companies like Microsoft, which is seen as a leader in AI with a rapidly growing business in this area. The script mentions Microsoft's development of a 'five billion run rate' business in AI within 18 months.

💡Market Cap

Market Cap, short for market capitalization, is the total value of a company's outstanding shares of stock. It is used to determine a company's size relative to others. The video discusses the competition among the most valuable public companies for the top market cap spot, indicating the significance of this metric in evaluating corporate success.

💡Microsoft

Microsoft is a leading multinational technology corporation known for its software products and services. The video script highlights Microsoft's strong position in the AI sector, its investment in data centers, and its ability to cross-sell AI products, which positions it as a good buy in the stock market.

💡Data Centers

Data centers are facilities used to house, power, and cool the computer systems and networks that store, process, and manage data. The script mentions Microsoft's significant investments in data centers, spending about 15 billion a quarter on capital expenditures, which is crucial for their AI business and cloud services.

💡CapEx

CapEx stands for capital expenditure, which refers to the funds a company spends to acquire, maintain, or improve its fixed assets. In the script, Microsoft's spending on data centers is highlighted as a key investment, amounting to about 15 billion a quarter, indicating the company's commitment to its technological infrastructure.

💡Azure

Azure is Microsoft's cloud computing service, which offers a range of cloud services, including analytics, storage, and machine learning. The video discusses how startups and companies are increasingly choosing to build on top of Microsoft Azure to access AI features, emphasizing Azure's role in Microsoft's enterprise AI strategy.

💡Enterprise AI

Enterprise AI refers to the integration of AI technologies within an organization's operations to improve efficiency, decision-making, and innovation. The script positions Microsoft as a leader in enterprise AI, with a broad penetration within the enterprise sector, allowing it to access and utilize vast amounts of data for training AI models.

💡Nvidia

Nvidia is a multinational technology company known for its graphics processing units (GPUs) and AI technologies. The video script presents a contrarian view on Nvidia, discussing the potential risks and challenges it faces due to increased competition and the need to diversify into software to sustain its growth and valuation.

💡Competition

In a business context, competition refers to the rivalry among companies for market share and customer preference. The script discusses the increased competition Nvidia faces from other tech giants developing their own AI chips, which could impact Nvidia's profitability and market position.

💡Valuation

Valuation is the process of determining the economic value of an asset or a company, often used in the context of stock prices and investment decisions. The video script analyzes the valuation of Nvidia, considering its forward PE (price-to-earnings) ratio and the sustainability of its high market multiples in the long term.

💡Software

Software refers to programs and applications that run on computers and other devices. The script suggests that Nvidia needs to focus more on its software offerings to boost its valuation and sustain growth, especially as the demand for GPUs may attenuate over time due to increased competition.

Highlights

Microsoft is considered a strong buy due to its leadership in AI and significant investments in data centers.

Microsoft has developed a $5 billion run rate business in AI within 18 months.

Microsoft's partnership with OpenAI and their investments in data centers are driving their AI advancements.

Microsoft is winning market share in cloud services against Amazon and Google.

Most startups are now choosing to build on Microsoft for early access to AI features on Azure.

Microsoft is the largest software company and is pursuing a cross-sell strategy with AI across its products.

Microsoft supports various AI model families, giving them access to a wealth of data for training and inference.

Microsoft's AI has shown a 50% improvement in developer productivity.

AI has enabled companies like Clara to cut their customer support team by two-thirds.

Despite growth, there is still significant room for AI adoption and market cap expansion for Microsoft.

The potential risk for Microsoft is the changing dynamics of its partnership with OpenAI.

OpenAI's broadening distribution and push into consumer search may create competition with Microsoft.

Nvidia's incredible stock performance and growth are driven by AI and inference capabilities.

Nvidia faces increasing competition from companies like Google, Amazon, and AMD developing their own AI chips.

Nvidia's profitability may shrink as competition increases and capex spend on chip development rises.

Nvidia's forward PE has historically spiked and then fallen, suggesting a potential pattern in valuation.

Nvidia needs to diversify into software to sustain its growth and valuation as demand for GPUs may attenuate.

The potential for competition to materialize slowly due to the complexities of chip fabrication could benefit Nvidia.

Investor's personal position: Microsoft as the largest public position and a small position in Nvidia.

Transcripts

[Music]

it's a big noisy Universe of stocks out

there welcome to goodbye or goodbye our

goal to help cut through that noise to

navigate the best moves for your

portfolio and today we're looking at the

most valuable public companies as they

battle it out for the top market cap

spot I'm here with Fury Ventures founder

Tomas tungo and uh interesting here

you're looking at these Mega cap tech

stocks and let's get to your buy stock

first that is Microsoft now Microsoft

obviously has already had a big run

right it's helped by all of this

optimism about AI but you think it's

still a good buy so let's get to why

first of all you think that the

potential in AI is even bigger it's

enormous Microsoft if you look at it is

basically the leader in AI they've

developed a five billion run rate

business in about 18 months and uh

because of their relationship with open

AI at least initially and their

significant investments in data centers

spending about 15 billion a quarter on

capex uh just in the data center alone

and since we're just in the early days

really I think the stock has a

meaningful way to run if you look at

their relative share compared to Amazon

and Google they're actually winning

share away from the other clouds and

then the last Dynamic is five years ago

most startups really wanted when they

started to build their companies they

wanted to build on Amazon and today most

companies are actually building on top

of Microsoft because they want access to

those AI features early on top of azure

specific yeah interesting so um

Enterprise AI is really then where they

sit and where the strength is for a

Microsoft right I mean and obviously

they have all those other relationships

outside of azure with all the other

software that they provide as well

that's right I mean you look at

Microsoft by far the largest software

company in the world the major motion

that they're now pursuing is ability to

cross sell so if you're a software

engineer and you want AI Microsoft will

sell it to you if you want a laptop with

AI Microsoft will sell it to you the

other Dynamic is they support many

different AI families of models so

there's the open AI models there's the

Facebook meta models like the Llama

models they support all of them they're

developing their own models and as a

result of that broad penetration within

the entprise they've accessed a lot to

data that other people just don't have

and so they can train and they can infer

and build new products and that

cross-cell motion I think will really

lead them to build a pretty significant

AI business I mean 5 billion in in 18

months growing 700% year-over-year it's

pretty amazing ability to create market

cap

and even with that growth you say

there's still a lot of room to grow

because the AI stuff that they are now

providing not all customers are using it

yet or they're not using the full scope

of the capabilities that's exactly right

so large numbers of customers I think

it's something like 80% of the Fortune

500 are now using AI but the penetration

is still really quite small if you look

at all the different products Nadel sat

and Adel is just a phenomenal job of

prioritizing within each of the product

lines AI being the the most important

feature that they sell and it's starting

to gain significant penetration but

we're still really in early days the

impact of some of these businesses in

terms of efficiency is absolutely

massive so Microsoft themselves is

seeing a 50% Improvement in developer

productivity through their AI service

now a 75% you saw Clara announced a

quarter ago that they cut two-thirds of

their customer support team as a result

of AI so there's a lot of efficiency

that Microsoft's AI in particular and

their systems will bring to these very

large companies and they'll be ble to to

reap disproportionate share so we always

like to point out potential risks when

we're talking about one of these goodbye

goodby cases and in this case it's maybe

that as you mentioned the the open AI

partnership is now a strength but maybe

it won't last forever it won't last

forever I me you look at what open a

announced uh two weeks ago with the

integration into Apple you can see that

open AI is looking to broaden out its

distribution and that's really important

open a and Microsoft had a strategic

relationship Microsoft invested about 13

billion and open was using a lot of the

Azure chips in order to train and run

the inference Microsoft then decided to

start to sell directly to their

Enterprises competing a little bit with

open Ai and then open AI is now pushing

more in a consumer search Direction so I

think you'll see open a and Microsoft

start to compete more and more which

will challenge that pretty key

relationship and there may be some

headwinds there I think that risk is

mitigated by the fact that there's so

many model families so many different

kinds of AI that Facebook and others are

creating that Microsoft should be able

to diversify but this is an important

risk for sure yeah interesting to keep

an eye on all right let's get to the

stock that you're avoiding right now and

this is I got to say you might be in the

minority on this one we're talking about

Nvidia because you know most of the

folks we talk to are big fans of Nvidia

and they think it's going to continue to

grow obviously the stock performance has

been incredible I mean when it gained as

much as it did last year we said there's

no way that can keep going and it has so

but you you talk about the competition

which is something that is out there

certainly a lot of F have brought up

this issue right so Nvidia unbelievable

performance right you've seen Revenue

increase 5x you've seen profitability go

from profits go from about 4 billion to

four 40 billion 46 billion in four years

really incredible business that's really

driven by Ai and the inference when you

have those profit margins like 60%

you're going to face a lot of

competition and it's not like I mean

Google has been developing their own TPU

chips Amazon has both training and

inference chips AMD just announced a

chip that is 30% more powerful than the

current Nvidia h100 which is the

dominant inference chip and so there

will be significantly more competition

here and if you look at nvidia's

profitability growth it's basically just

a doubling or tripling in prices in

terms of the gpus and as more

competition comes in as the capex spend

increases pretty materially on the

development of these chips I think those

profit margins ultimately shrink

interesting okay and let's also talk

about valuation because that's a part of

the story um um so if you look at the PE

that we have seen and this is the

forward PE this is going back um five

years I believe on this forward PE and

you have seen sort of spikes in the PE

and then it's come back down right so

what is that I mean we're not quite at

the spike yet here and in fact a lot of

the people we talk to say actually the

the valuation hasn't gone up that much

but how are you thinking about the waves

that we have seen so in video if you

look at this doc over a 15E basis has

seen three major waves the first wave

was around gaming in the 201 2012 time

frame the second wave was driven by

crypto uh in sort of the 2018 2020 wave

before yeah and now we're sort of in the

AI wave and at each point in those waves

the PE has gone above 50 and then 68

quarters later has fallen to 25 so the

counterargument would be well this wave

will run a lot longer because uh the and

the Nvidia team has said at least

through the end of next year there's

plenty of demand for gpus that outstrip

Supply but over time the reality is this

is a company that's selling chips and

these kinds of multiples I think really

difficult to sustain over the long term

right it's quite unusual so they need to

look into software and they already have

right they they're selling sort of this

site including the chips including the

whole um the rack as part of the whole

selling point and the software but you

think they need to get more into

software I think they absolutely need to

get more into software I mean you think

about um the multiples that software

companies have they typically trade as a

function of Revenue particularly the

high growth once and I'd put in vdf if

you were to think about it as a software

company would probably trade it

somewhere between 12 to 18 times top

quartile maybe even a little higher just

because of the Dynamics around Ai and

how special they are but the reality is

the fraction of Revenue today and

software is is not disclosed and it's

probably still quite small so as the

demand for gpus attenuates with time

they will need software to meaningfully

boost up their multiple particularly

because the growth rates of the data

center business will potto today you're

seeing uh Microsoft and Google and um

and Amazon spend about 12 to 15 billion

doar in data center a quarter over time

that will sort of that will sort of

decrease and so the growth rate in the

data center part of the business which

today is about 60% of the revenue by far

the fastest growing compared to gaming

and Automotive will slow and so software

will absolutely be the key very

interesting okay so let's get to what

though could go right for NVIDIA and

that's just that you know there is this

promise of competition but it might not

come for what that's right so I'm a

long-term investor so I'm think about 3

to 5 years in terms of how people

actually compete with Nvidia you need to

produce chips right and within the us

our ability to fabricate chips is pretty

limited because we've outsourced that

through the whole fabulous wave in the

80s and 90s and it's it will take a long

time to get these Fabs fabrication

manufacturing facilities up and running

and the time to ship some of these chips

is a lot longer it's just in software

right there's tape out you have to

actually produce it there's yield

management there all kinds of Supply

chains and so it may take take longer

than and particularly I mean you look at

Facebook will spend alone $20 billion

this year buying gpus right Amazon and

Google who are building their own chips

they may not be able to Ram production

that quickly or even uh satisfy any of

that Dem Mana Microsoft right in the

last quarterly uh release said that um

they're unable to satisfy the demand so

yeah so okay well we'll see what happens

with Nvidia real quickly before we let

you go what are your positions in each

of these stocks so I hold uh Microsoft

is my single largest public position uh

Nvidia is a very very small position

gotcha okay toas thanks so much really

appreciate it interesting stuff and a

little bit of contrarian take on Nvidia

appreciate it thank you so much for

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