Microsoft’s ChatGPT investment is what ‘you want to see from a mega-cap tech name,’ strategist says

Robert Stimpson Co-CIO Oak Associates Funds joins Yahoo Finance Live to discuss Microsoft’s investment in ChatGPT and AI, the softening cloud business, as well as how Elon Musk's Twitter venture is affecting Tesla stock.

Video Transcript

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- Well, it's a big week for tech as Microsoft earnings kicks things off with a less than desired outcome, as its worrisome guidance hits other mega tech names. Well, here to dig deeper on Microsoft and the rest of the tech space is Robert Stimpson-- Oak Associates Co-CIO. Good to see you, Robert. So as we were taking a look through some of the revenue drivers there for Microsoft, Azure stood out, and we know that you said that that's one to watch, but obviously, getting a lot of the headlines is that investment in OpenAI. If you're Microsoft, how should you be putting your capital to work, right Now?

Well, we think the OpenAI investment into ChatGPT is the type of decision you want to see from a mega-cap tech name, like Microsoft. We do not want to see them sacrifice those opportunities to the likes of Google or Amazon or Facebook. So we're encouraged by that sort of investment for the future.

And so, as we look at Azure especially and where it's going from here, and then when you compare it to what we're seeing with the cloud business, some of these growth drivers that allow them to be able to pour innovation into these other sectors, what are your expectations for the cloud business?

Well, the cloud is certainly, the growth business for Microsoft. And when we look at the stock today, it's really, a tale of two cities. They have the PC business, which is slowing and mature, and then they have growth in the cloud business, and that's definitely the area that the market is watching, it's been successful, and a little softening going forward is to be expected because, after all, this is a $52 billion revenue company. It's hard to maintain that revenue growth, and I understand that businesses are kind of rationalizing their spend after two years of trying to be more efficient, more productive coming out of COVID.

And so, Robert, then, I know that one of the negatives that you highlighted was the current valuation, especially when you look at, say, a Google or a Meta. How are you, when you think of where the valuations might go from here, what do you think might actually work in Microsoft's favor since they do still have such a high valuation?

Well, I think, they've been benefiting from the idea that, as a megacap tech company, there is some safety and security in their size and their market cap, but when you separate Microsoft into those two industries, of being a legacy PC company and a growth cloud company, the valuation multiple should probably somewhere in between of those two businesses. And unfortunately, it's not. It's definitely more towards the higher end at 24 times next year's earnings, price to sales of almost nine times. Those are pretty rich multiples when other tech names have similar growth opportunities, but are trading at much more reasonable valuations. Whether it's Google at 18 times earnings or Facebook at 13 times earnings, other mega-cap names just don't have that premium, and we think that the upside is still good in those areas.

And so, when we look at some of the issues that we're still dragging in from 2022-- the macroeconomic background, Fed continuing to tighten, albeit at a slower pace-- when you look at some of perhaps, the potential for the biggest winners this earnings season in tech, who stands out to you?

We do like the semi-conductor space. People forget, it's a boom and bust cycle in semiconductors, and we had some supply disruptions during the pandemic, but valuations have contracted sharply. China is reopening. The appetite for semiconductors is still very strong. So, as an industry, there's some inventory that needs to be worked off in some of the more industrial, automotive, and PC names, but it's still a growth industry that you can get access to at a much more reasonable valuation, knowing it has a long tail of growth behind it.

And Robert, I want to ask you about layoffs. Obviously, we've seen Microsoft part of that as well, with its own set of 10,000 layoffs. Haven't heard anything from Apple, yet. Apple have done hiring freezes, but haven't made those cuts, yet. Do we expect much deeper cuts overall for tech, and why do you think we haven't seen it for Apple, yet?

That's a good question. I expect, we probably will at some point. All of the tech companies were aggressive in hiring during the pandemic. They kind of benefited from the work-from-home trade and enabling other companies to move to a more distributed workforce environment. And there's going to need to be some rationalization of that workforce going forward. So I think that the layoffs we've seen from a lot of the major tech companies is probably, just round one. I think, Microsoft hired something, like, 75,000 people over the last four years, and last year headcount was up over 19%. So as these tech companies make their own expense reductions, headcount is going to be a big area.

And Robert, of course, we know that Tesla's reporting after the bell, but I do want to ask you about Musk. A lot of people, especially investors, frustrated about the distractions-- you have Twitter, you have the ongoing shareholder lawsuit. How do you think this is all going to pan out for Tesla, since it does have some very ambitious production targets, now?

Well, Tesla has a great product, a great car, but the stock has been very volatile, and Elon's personality is affecting its share price. So while the underlying product is good, the high valuation, as well as some significant changes in the competitive environment over the last two years. I think, every major automaker now has a line up of EVs available, and Tesla is no longer the best option for some people. So given the changes in the competitive landscape, the stock's been under pressure, Elon's been a little bit of a distraction, and as a result, it may not ever receive the premium fanbase or valuation that it had enjoyed previously.

It certainly is a very different time we're living in now, in the EV space. Robert Stimpson-- Oak Associates Co-CEO-- thank you for joining me this morning.