To The Moon

AI chip stocks pulled back. Memory names sold off. But software stocks bounced. $Microsoft(MSFT)$

• 👏 Congrats to @月光下的美, who made 394% on Microsoft calls!

• 👏 Congrats to @Leo Leo, who made 118.8% on Microsoft calls!

So why did Microsoft rebound?

For most of this year, the AI trade was all about hardware. Big tech companies kept spending on GPUs, servers, HBM, DRAM and enterprise SSDs. That helped names like Nvidia, Micron, SK Hynix, Western Digital, SanDisk and Seagate. The idea was simple: if AI data centers keep growing, chip and memory demand should keep rising.

But after a huge run, investors are starting to ask a harder question: When does all this AI spending actually turn into revenue? That is why hardware and memory stocks have come under pressure. It does not mean the AI trade is over. It means investors are becoming more selective.

Meta’s latest plan added to that debate. According to media reports, Meta is considering using extra AI computing capacity for cloud services. This matters because investors have been worried that Meta, Microsoft, Google and Amazon are spending too much on data centers, with AI capex weighing on future free cash flow.

But if unused AI capacity can be rented out, or if AI infrastructure can become a new cloud business, investors may start to look at capex differently. It is not just a cost. It could also become a future revenue stream.

That is one reason software and cloud stocks bounced. The market may be moving into a new phase of the AI trade. Earlier in the AI trade, investors focused on the companies selling GPUs, memory and servers. Now the question is shifting to companies that can turn AI into products, subscriptions and profits.

If AI compute becomes cheaper, software companies could benefit. If businesses start using Copilot, AI agents and automation tools more seriously, software and cloud platforms may have a stronger path to AI revenue.

Why Microsoft?

Microsoft is one of the clearest names in this part of the AI trade.

Many AI companies still need to prove their business models. Microsoft does not. It already has Office, Teams, Windows, Dynamics, LinkedIn, GitHub and Azure. It also has a massive enterprise customer base.That gives Microsoft a simple path to monetize AI.

It can add Copilot and AI agents into products customers already use every day, then charge through subscriptions, upgrades and premium features.

The fundamentals also remain strong.

In fiscal Q3 2026, Microsoft reported revenue of $82.9 billion, up 18% year over year. Operating income rose 20% to $38.4 billion. EPS rose 21% to $4.27.

Azure and other cloud services grew 40%. Intelligent Cloud revenue rose 30% to $34.7 billion. Microsoft Cloud revenue grew 29% to $54.5 billion.

Microsoft also has something many AI companies do not have: cash flow.

The company is still spending heavily on AI data centers. Fourth-quarter capex is expected to exceed $40 billion, but Microsoft generated $46.68 billion in operating cash flow in fiscal Q3. Even with higher capital spending, free cash flow was still about $15.8 billion. Microsoft is spending a lot on AI. But it is also still generating a lot of cash.

Is Microsoft expensive?

As of July 8, Microsoft traded around $388.84. Its market cap was about $2.89 trillion, and its P/E ratio was around 23. For a business like Microsoft, the valuation does not look stretched. because It has cloud, enterprise software, AI, Office, Windows, LinkedIn, GitHub and one of the strongest cash flow profiles in tech.Microsoft is down about 19% so far in 2026. A lot of the bad news may already be priced in, including AI capex worries, slower software growth and pressure from the Xbox business.

In the short term, the stock could still be volatile. Capex concerns and earnings expectations may continue to drive the share price. But for investors looking one to three years out, Microsoft looks more attractive than it did when the market was willing to pay any price for AI exposure.

What do you think?

• Is the AI trade moving from hardware to software?

• Has Microsoft already bottomed?

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