Microsoft is Perfectly Flat

These views are always made in the context of a well-diversified portfolio and are not meant to be a recommendation to buy into or sell out of a particular area of the market. These views can and will change as new information becomes available, and we will periodically update this brief to keep you informed of changes.

We’re going to highlight one of the Magnificent 7 names, Microsoft. Over the last year through February 13th, Microsoft has been amazingly…flat.

Compared to S&P500 during the same time, the underperformance was 23%, even though Microsoft represents 6% of the index. The concentration risk that we’ve been worried about was offset by performance from 499 other names. It also helps that NVDA was up 82% during the same period.

Index weighting is important because if someone buys $100 worth of the S&P500, $6 goes toward buying Microsoft. Think about how many people consistently buy the S&P500 through their 401k contributions every two weeks.

This isn’t a dig at Microsoft. It isn’t necessarily a recommendation to buy either. There’s nothing new that can be said about the company that you don’t already know. A company this widely followed has few surprises and fewer opportunities for consistent outsized gains. An average of 21,000,000 shares changes hands every day. That’s a lot of market participants, who we tend to think did their homework, trading this company.

Earnings have been consistently great but so have expectations. For companies to continue exceeding expectations they need to keep surprising. It becomes increasingly difficult as the company grows.

Another catalyst will be needed to keep the party going. The AI story essentially looks priced in and the fervor over the technology seems to be lying dormant. At least as it relates to the current hyperscalers like Microsoft, Google, and Amazon.

Microsoft has outperformed the S&P500 by large margins in 2023 and 2024. The optimism surrounding AI benefited the company and its investment in OpenAI. The consistent build out of the company’s infrastructure was celebrated by Wall Street until it wasn’t.

Going back three years, Microsoft performed just as good as the S&P500. Looking closer at the chart, while both investments ended up in the same place, Microsoft was much more volatile. That’s usually the unseen side of investing, the underlying risks.

As a single stock, Microsoft has a good chance of beating the market over the next year. We can also say that Microsoft has an equally good chance of underperforming the market over the next year. All we’re pointing out is the potential opportunity costs of being concentrated. It cuts both ways.

We’re now in the “prove it” stage where the narrative shifted to questions on how Microsoft can make money off all this investment. In a double down moment, Microsoft has committed to spend $80 billion on AI this year. That’s on top of an estimated $120 billion spent since 2022. Can Microsoft recoup over $200 billion in investment? More importantly, how fast can the company recoup its investment?

Competition represents risk here too. There are several trillion-dollar companies all vying to improve or build out their own AI. We haven’t even gotten to Deepseek yet. If the biggest threat to US-made AI is better efficiency abroad, valid concerns will arise over how much is being spent on this buildout.

Say all this buildout is necessary. It is still nearly impossible to figure out who the winner will be. That’s where the uncertainty lies, and the market knows it.

Then there are other emerging technologies like quantum computing. Not to say this is a great investment now, but it’s taking attention away from retail traders. I don’t know how I’d quantify this, but it seems like blind buying has shifted towards much more speculative names.

Great companies historically have struggled to stay at the top. The biggest factor could be math. Microsoft’s market cap topped at $3.5 trillion before settling at “just” $3 trillion. The company lost $500 billion in value in just 8 months.

Despite all the consistent buying from 401ks, the sheer amount of money needed to trade into the stock is apparent when we look at market caps in the trillions.

Owning single names brings not only market risks, the stock going down with the market, but also company-specific risks. All the previous outsized returns were the reward for taking on such risks.

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