Microsoft is past its glory days says UK fund manager
Liontrust’s global innovation fund team made a striking call that bucks the conventional wisdom of leading tech stocks by saying that Microsoft, one of the world’s most valuable firms, may no longer be a long-term winner.
Storm Uru and Clare Pleydell-Bouverie, co-managers of Liontrust’s Innovation Fund, have told City PM they no longer hold any of the tech giant’s shares in the fund’s portfolio – a bold move at a time when the software giant dominates benchmarks and investor portfolios alike.
“We sold out of Microsoft after six years” said Pleydell-Bouverie. “We don’t think the Windows operating system is necessarily in this age of what we call software 2.0 – built on accelerated compute infrastructure”.
The firm is currently underweight, five of the seven so-called magnificent seven mega-cap tech names. Uru and Pleydell-Bouverie argued that this decision is driven by a fundamental rethink of who will lead in the AI age.
“The winners over the next decade will be different from the last decade”, said Uru.
AI could hurt Microsoft
According to Liontrust, Microsoft – and legacy tech more broadly – is being squeezed by a faster innovation cycle and fresh new AI-native competitors.
The fund’s managers point to a “collapse” in product development timelines driven by advances in chip architecture and software automation.
“When you have a doubling of the rate of innovation from the linchpin of the ecosystem, that means everyone around you had to respond or be left behind”, Pleydell-Bouverie told City PM. “We’re already starting to see that – look at Intel”.
However, Microsoft’s AI initiatives, including its Copilot and Azure expansion, have swooned analysts and investors.
Analysts at TD Cowen and eToro emphasised the importance of monitoring CapEx trends, AI monetisation, and Azure’s continued growth momentum.
“Although the spending is high, it’s what’s needed to stay ahead”, said Etoro analyst Josh Gilbert. “Microsoft’s ability to generate high returns on capital and sustained revenue growth should help ease concerns”.
Yet, this wasn’t enough to convince the asset management firm.
“I don’t know if you’ve tried Copilot”, added Pleydell-Bouverie, “it’s a pretty clunky experience”.
Reassessing the AI advantage
While Microsoft holds a significant stake in OpenAI, Liontrust has questioned whether that’s enough to maintain dominance.
“They’ve been over-earning”, says Uru. “It’s not just about having the data – it’s about having real-time data. That’s why we’re excited about companies like Spotify, Netflix, and even satellite firms like Planet Labs”.
Pleydell-Bouverie added: “Enterprise software companies like Microsoft and Salesforce don’t actually own much of the data they claim to. Their moats are eroding, and they’ll have to recalibrate their pricing models”.
Liontrust’s stance isn’t without risk, however. Microsoft remains one of the largest components of global equity benchmarks, and not holding it has the potential to drag on short-term performance.
What’s more, the tech giant delivered another quarter of better than expected earnings, driven by its booming cloud and artificial intelligence (AI) businesses.
The company posted revenue of $70.1bn (£52.5bn) for the quarter ending in March, up 13 per cent year on year, while net income climbed 18 per cent to $25.8bn – comfortably above analyst forecasts.
But, the team remains undeterred, claiming to not be concerned about the benchmark. “Only 10 per cent of global equity funds have beaten the benchmark recently”, Uru said, explaining that one can’t generate differentiated returns by owning the same names everyone else does.