This is just my view.
MSFT software segment is locked in. The thing to look out for whether multiple expands and earnings increase relies on 2 metrics in the longer term, Model pricing and Enterprise AI usage adoption. Ofcourse there are other factors such as Open AI, Azure growth, free cashflow conversion, and gross margin to look out for, but below should ultimately decide whether it goes up or down.
|Scenario|Model Pricing|Enterprise Agentic AI usage|MSFT impact|
|:-|:-|:-|:-|
||
|Best case:|Falls heavily|Usage explodes|Very Bullish, copilot and cowork adoption expands rapidly|
|Base case:|Falls moderately|Usage steadily grows|Bullish, margin improves as model routing and inference chip efficiency gets better|
|Worst case:|Falls quickly|Usage stalls or grow modestly|Bearish, Capex overbuild risk, high depreciation, questions about quality of Azure RPO backlog|
The underlying assumptions here are:
* **Open source, and Small-mid weight model** will reduce the reasoning gap to frontier models and achieve a base level reasoning enough for daily enterprise usecase at reliable accuracy (you can argue its almost here already). I believe OpenAI and Claude will somewhat lose API pricing power and then RPO concerntration from Open AI becomes risky unless Agentic AI/AI adoption grows enough to offset.
* **LLM won't lead to AGI**, judgement, sentiment and many other human traits are too far in the learning curve from current methodology. We first need LLM, physical AI, human brain chips and then we shall see (but nothing within the next decade) atleast.
* **AI adoption will be way quicker** than other industrial revolution given software, application layers and enterprise customers (450 mil) are already in place (365, copilot, cowork, github, foundry and so on). Internet needed software, socials, search engines, smart phones. Railways needed factories, towns to build up around the stations and so on thus it took a lot of time to pay off. Unlike previous infrastructure builder (CISCO and Rail builders), MSFT control all layers including the infra and software so the return of capital won't leak outside entirely. Hence the base case being bullish.
In simple sense, they have passengers (enterprise customers), factories (MSFT 365) and towns (software workflows) already built and improving rapidly. They are spending shit tons on railways (Azure compute and datacentres) so they can start charging for the freight and tickets. Will passenger and manufacturer use the train depends on the cost, the tangible ROI, and how easily the workforce adapts.
By no means I am an AI expert so do your own DD. I do hold few options for full disclosure.