$MSFT is the worst performing mega-cap stock year-to-date.

I see many people think the sell-off is ridiculous but I don’t see anything wrong with the valuation.

It has two problems:

- 45% of Azure backlog is from OpenAI
- AI is undermining its software business

First things first, I don’t think its software business will be disrupted by AI.

Its tools are not complex enough to warrant standalone AI applications to replace them. This is the case for Adobe for example but not for Microsoft.

Second, they are interconnected with each other, powering a full suite of capabilities and they are embedded in almost all enterprise workflows.

So, what’ll happen is that these tools will be automated by AI to some degree but we’ll still be paying licensing to work with them as it’s costlier trying to replace them thanks to their embeddedness.

When it comes to Azure, existing backlog is likely secure given that OpenAI raised over $100 billion recently and it will raise more with the coming IPO.

The problem is that OpenAI is diversifying away from Azure, so cloud growth may not be as strong beyond 2027 as it’s been so far.

All those things accounted for, the stock is trading at 13x 2030 earnings which is in line with other mega-caps like $AMZN and $GOOG.

In short, it’s not undervalued as many people think it is due the ytd sell-off.

It’s fairly valued and it needs to come down a bit more to be really attractive.