Depending on who you ask, it might seem like Microsoft (NASDAQ:MSFT) has started to show signs of falling behind in the AI race. Add the recent wave of jitters working its way through enterprise software, and it might be no surprise as to why investors are opting to sell amid the accelerating negative momentum in the shares.
With huge capital expenditures for the year and a lot of hope riding on the firm’s next innings of AI, along with uncertainties surrounding whether new AI tools will cannibalize various parts of the software business, it did not take all too long for Microsoft to go from dominant AI kingpin to a giant question mark. Of course, that last quarter saw Azure disappoint, marking a major turning point.
That said, as I mentioned in a prior piece, Azure’s true strength was likely being masked by capacity issues that will, in due time, be taken care of. After that, we’ll get a real grasp of the strength of Azure as AI demand looks to stay off the charts. On the AI data center front, I think Microsoft is on the right track.
Bottlenecks and backlogs: Could the worst be over?
Azure is running at a decent, though less applause-worthy velocity. The backlog is packed, and once the power and physical hurdles can be overcome, I certainly wouldn’t want to stand in the way of Microsoft going into its future quarters, especially now that the expectations bar has been lowered by quite a bit.
Today, the stock is in the process of recovering, but shares remain off close to 19% from those mid-2025 peak levels. While Azure’s big inflection point may still be a few quarters off, I still think the worst might already be in the books for the enterprise AI giant, which is arguably best-positioned to lead AI monetization at both the infrastructure and application layers.
If there’s a company that could become a king on both fronts, it’s Microsoft. Further, there’s also an opportunity to be one of the leaders in the AI model layer as the firm looks to reduce its reliance on OpenAI’s ChatGPT.
In any case, Copilot is undergoing a major overhaul, and the enterprise giant is going through a “Code Red.” That might seem startling to some, but such an alarming issuance might actually be the catalyst for the firm to really start sprinting in this AI race. Just over three years ago, Alphabet (NASDAQ:GOOG) had its own “Code Red” of sorts. Since then, things worked out quite favorably for the firm, with shares soaring triple-digit percentage points as Google Gemini raced ahead.
Any way you look at it, Microsoft has made moves to address its power bottleneck. And it’s not shying away from spending money to further its position in the hyperscaler race.
Microsoft’s Code Red might be a huge catalyst
The obscene spending won’t be for nothing. Remember that CEO Satya Nadella is a master at executing profound, transformative shifts. And, in my view, he will not disappoint, even as some investors lose faith as the CapEx fears, AI unknowns, and subpar quarters nudge some to take their profits off the table.
With Microsoft entering a “Code Red” on Copilot, it feels like Microsoft at a bear-market-esque discount might actually be a worse buy than Nvidia (NASDAQ:NVDA) at a few percentage points away from new highs. In my view, though, the move is a catalyst for positive change and a sense of urgency that might allow Microsoft to outrun its hyperscaler peers in the next 18 months.
As Microsoft takes a step back to reposition for the agentic AI era, I wouldn’t want to bet against Microsoft and Nadella. The company is expanding across the AI stack, and if it can perfect Copilot, there’s really no telling what the next big move will be. In due time, I not only think Microsoft can keep up in the AI race, but I view it as best-equipped to emerge from the rise of agentics as a dominant leader once Copilot and Microsoft Agent find their stride.
With earnings just a week away, it’ll be very interesting to see how the enterprise giant has improved since that tough last quarterly result.
