Infinitely curious. “Spend each day trying to be a little wiser than you were when you woke up.” - Charlie Munger Nothing here is investment advice
Boston, MA
Joined June 2019
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$MSFT is still down on the year, and <20x my estimate of CY27 EPS. With Azure growing mid-high 40s, and M365 commercial ($100B business) soon to accelerate to the 20s, I think multiple expansion is warranted. The vast majority of MSFT revenue and profits are clearly benefitting from AI and the business will see earnings compound in the 25%+ range.
Why I’m so confident in >20% growth for M365 Comm’l in several quarters:
- Copilot adoption alone at current pace of +10M/seat per quarter, at a 25% discount to $30 list, will do it (I est. copilot is contributing ~4pt of growth today going to ~10pt NTM).
- Copilot seats additions are accelerating, and the math below assumes they stabilize at +10M/qtr.
- ARPU upside (1): MSFT new E7 SKU launched in May is a $100 SKU vs. a modeled standalone Copilot ARPU of +$30 (discounted 25%).
- ARPU upside (2): MSFT turned on consumption pricing for Copilot in July, some users will eat into consumption tier driving ARPU >$30.
- MSFT recently launched premium consumption add-on products, such as Project Perception, an autonomous cyber agent that hunts for threats and vulnerabilities. Security is the hottest spend category right now and I wouldn’t be surprised if Perception was a hit.
- Lastly and possibly most significantly, MSFT just took a series of price increases on M365 commercial, effective 7/1. It’s first price incr. since 2022. So core growth ex Copilot should accelerate.
Despite a +16% move today, the market may still be under-reacting to $MSFTs results last night (still down on yr).
Azure growing +43% and guiding to +45% grabbed the headlines, but MSFT was in its worst performance stretch since the GFC, and lowest valuation in a decade, because the world viewed its flagship Office franchise as an AI loser.
That view is now demonstrated to be wrong, as Office showed accelerating growth, and Mgmt. guided to continued acceleration throughout FY27 (a strong signal from a conservative mgmt team).
I believe MSFT's ~$100B Commercial Office segment can accelerate from mid-teens growth today to >20% growth rates over the next several quarters, driven by current pace of Copilot adoption and a reasonable assumption around E7 agentic orchestration SKU penetration. Paired w/ mid-40s growth in Azure, MSFT sets up well to drive accelerating overall topline and earnings growth over the next couple years.
See below where, adjusted for Fx and rev rec, MSFT Commercial Office is already showing clear acceleration, from 14% growth to 16% growth in the last year. If you add the typical beat margin to mgmt's guide, Office will accelerate to +17% growth in 1Q and then further through FY27 (a strong indication from a conservative team).
In the the thread below I'll show how continued execution of Copilot at 4Q levels can lift the segment to >20% growth.
~Half of Anthropic revenue is generated through CSP marketplaces like $AMZN bedrock, $GOOG Vertex, $MSFT Foundry.
That is even more than I'd have thought.
Just Going to start an Anthropic thread.
Ant is spending ~3x more compute on R&D (assuming 75% of R&D is compute) than on COGS, and has ~85% gross margins.
Directionally confirmatory, but that is even more compute spend on R&D vs. inference, and better gross margins than I'd have thought.
I suspect benefitting from TaaS mix, where the cloud providers like AMZN provide the inference on Bedrock, paid for in Ant's "partnerships" expense.
This is the only way Ant having more S&M expense than COGS could make sense.
Just Going to start an Anthropic thread.
Ant is spending ~3x more compute on R&D (assuming 75% of R&D is compute) than on COGS, and has ~85% gross margins.
Directionally confirmatory, but that is even more compute spend on R&D vs. inference, and better gross margins than I'd have thought.
I suspect benefitting from TaaS mix, where the cloud providers like AMZN provide the inference on Bedrock, paid for in Ant's "partnerships" expense.
This is the only way Ant having more S&M expense than COGS could make sense.
Anthropic is GAAP profitable.
I also like the way they just break out compute expense instead of hiding it in COGS and R&D. They spent ~48% of sales on compute in 2Q.
$WDC guiding Dec quarter EPS ~20% above consensus, visibility with top7 customers through 2030-2031, accelerating EB growth via higher capacity drives at lower cost, and visibility to ~4-5qtr of rising $/EB. Growing >60 w/ 80% incremental margins. Unlevered, buying back gobs of stock.
This is a $330 stock AH and could earn $50-60 in CY28. Might earn its mkt cap back in next 4-5yrs.
And yet, stock is -5% AH.
Absent the very odd 8k, $META results were strong.
- 26% revenue growth
- Guided to ~150bp acceleration in 4Q at the midpoint
- 10M muse accounts, 15M Meta One, and both are in infancy and mostly just rolled to North America. 92% of META users are outside NA
- Committed to bring down FRL losses and trend towards profitability over time
Stock is trading at a low-mid teens multiple of ex-Muse/FRL earnings and ~19x EPS fully capitalizing those investments.
Without the cap raise 8k, the stock would be up. If we assume they might raise $100B, with 0 ROIC on the invested proceeds, maybe the equity raise has a max negative value of -6% in the most punitive scenario.
Think the underlying results were strong enough to offset and stock has overreacted.
@alexandr_wang @finkd
FYI, the market is speaking and saying they don’t want you guys to issue “hundreds of billions” of stock for Muse
$META business results were fantastic. Just overshadowed by fear of dilution.
Interesting to look at META revenue trends in North America, where they have rolled out Muse + Meta One + more of the advanced ad products and models. It is growing nearly 33% and has accelerated every quarter this year.
They will roll out the NA playbook to RoW as they get more compute. What do you expect to happen?
Market is concerned that AI is approaching peak supply/demand imbalance, therefore putting low multiples on many AI chip and supply chain stocks, fearing peak earnings.
Vs.
@elonmusk has decided to sell $SPCX compute entirely in the spot market because he thinks the compute shortage will persist for many years, and prices for compute will go even higher over time.
One of these are wrong. If Elon is wrong, his business will be the first place that every customer goes to cut in an overbuild, since he is selling the most expensive compute with the shortest terms.
The legend of Analyst #3 grows stronger…
“As a final push over the edge for Scorpion Antivenom, Analyst #3 proposed that once we’d gotten the lab data back, he was willing to volunteer to cut to the chase, skip the animal trials and get stung by a scorpion to see if it worked - provided we conducted this exercise outside of a hospital that stocked the FDA-approved antivenom.”
@citrini
What is AI really capable of in bio?
To separate hype from reality, we spent 3 months working firsthand with @AnthropicAI's internal research model to see if it could create an experimental scorpion antivenom.
Introducing Citrini Therapeutics.
citriniresearch.com/p/citrin…
Even for someone optimistic on AI in the long term, objectively Ant went from adding 10B rev per month to ~2-3B of rev per month. Growth has slowed significantly in real terms, it’s not just “law of large numbers” deceleration, it is actual slowdown. On 70B base their recent rate of growth is possibly <50% forward annualized, which is slower than the Hyperscalers entire businesses are currently growing (CSP AI biz growing much faster obviously).
Data indicates potential acceleration for Ant from Aug-Sept levels in Oct, and there are 1-off headwinds they have absorbed contributing to slower recent levels of growth.
But that the business can decel by ~8B/mo almost as quickly as it accelerated highlights the risk, and why mkt is so jumpy on datapoints.
Not irrational at all that AI stocks are down this much. Add in rates/debt markets, politics, supply chains, lots of reason for elevated discount rates.
For the bull case for AI supply chain stocks in the short term, you need to see:
- Successful Ant IPO / OAI fundraise
- Rates to calm down and appetite from debt markets to support current rate of issuance for a few more years as buildout > monetization.
- Blowout cloud earnings and positive EPS revisions
- A few more “Claude code” moments unlocking new TAM from better models / harnesses / applications to re-accelerate AI token monetization trends out of current lull.
The trend is no longer your friend unfortunately.
Enjoyed these thoughts from @pmje73
I think this recent volatility continues to reflect the misalignment in the product cycle and the capital cycle. The product cycle itself has gotten more complex not simpler due to the continued presence of multiple competing products and the shifting relevance of open and closed models. The capital cycle is adding complexity on the other side of complexity proving two things can be true. The market can be structurally under supplied compute/infra but the capital complexity to finance the build may be over extended and overly complicated. I observe a lot of frustration about this dynamic. If you are super bullish long term this should be great. I think the issue is people are more bullish about the economics caused by the under supply than perhaps their bullishness on the underlying unit economics of the products on the other side of the shortages. The frustration is driven by not getting/keeping a sustained multiple now on the current economics reflexively driven by the supply/demand imbalance. I wont pretend to know what’s going to happen to alleviate supply or not, or what the economics of the models will look like depending on the slope of supply. I just know this kind of uncertainty usually leads to volatility because the market hates uncertainty more than anything. That means being nimble. Just when you think there is a clear trend, something else will change and make you re-think everything you believe today.
Li Lu talks at Columbia Business School with a few good riffs on AI youtu.be/YRhnX_JAbC8?si=N0V7…
Did Anthropic read the @SemiAnalysis_ assessment of subscription value and cut token limits in half? I am burning through session allocations in 1 hr. And 40% through weekly limits in a day.