By Artificial intelligence is one of the main reasons many experts remain bullish on Microsoft Corp (NASDAQ: MSFT), despite its year-to-date rally. However, Stephen Yiu of Blue Whale Growth Fund has a different perspective.
The Chief Investment Officer has been offloading shares of the tech giant in recent months, concerned that AI investments could significantly impact profit margins.
Notably, Yiu’s fund returned over 30% last year, outperforming the S&P 500, which saw gains of around 26%.
Why is Stephen Yiu cautious about Microsoft stock?
The Blue Whale Growth Fund has held MSFT since its inception, but in August, Stephen Yiu began reducing the fund’s position. His reasoning? The business model of Microsoft is poised for a dramatic shift, driven by generative AI.
Yiu is particularly worried about the new Office 365 Copilot, as the hardware infrastructure and immense computing power needed for AI services are far more expensive than traditional software subscriptions.
“The quality of Microsoft’s earnings in the next five to ten years is likely to decline compared to what we’ve seen so far,” he said at the Quality-Growth Investor Conference in London.
While MSFT is committed to building in-house AI chips, which could help reduce costs in the long term, Yiu pointed out that this initiative is substantially increasing the company’s expenses shortly.
As of now, Microsoft stock is down over 10% from its year-to-date peak in early July.
Wall Street is still super bullish on Microsoft shares
Stephen Yiu does expect artificial intelligence to help boost the company’s revenue but the return on invested capital, he argued, will decline as spending on AI is not a one-time investment.
They need to forever invest into the hardware or the AI infrastructure to give us AI capability. It’s forever demanding because of the AI learning and retraining. The feedback loop will never stop.”
His outlook on Microsoft stock is materially different than Wall Street.
Analysts currently have a consensus “buy” rating on the multinational based out of Redmond, Washington.
Their average price target of $497 indicates potential for about a 20% upside from here.
It is also worth mentioning that Microsoft shares now pay a dividend yield of 0.80% which makes them comparatively better positioned for healthy total returns.
Microsoft Corp is scheduled to report its financial results for the first quarter on October 22nd.
The consensus is for it to earn $3.08 a share versus $2.99 per share a year ago.
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