Microsoft’s first-mover advantage in AI is fading. Why we’re OK with that

Microsoft is no longer the only game in town in generative AI. That's OK because competition is healthy. Amazon , Meta Platforms and Apple are eating away at Microsoft's once-sizable lead in the heated artificial intelligence arms race, according to D.A. Davidson research analysts. As a result, the analysts cut their rating on the Redmond, Washington-based software and cloud giant's stock to neutral from buy. But they left their price target of $475 per share unchanged, representing a 9% upside from Friday's close. D.A. Davidson wrote in a Monday note, "Microsoft's lead is now diminished in both the cloud business and code generation," which are tools and services that leverage AI to assist developers in writing code more efficiently. The analysts said that, for those reasons, it will be difficult for the stock to outperform. During his trip last week to Big Tech country in and around San Francisco, Jim Cramer was catching vibes of Microsoft's dwindling head start. However, Jim defended Microsoft, saying it's still "considered the dominant AI force." He added that "when combined with ChatGPT, it is the default choice for companies to work with in some way to be sure they are taking advantage of what AI has to offer." More competition does not merit a downgrade. In fact, we feel Microsoft and fellow tech behemoths can all benefit from commercializing AI. We have our buy-equivalent 1 rating on Microsoft and a $500 price target. MSFT YTD mountain Microsoft (MSFT) year-to-date performance To be sure, we understand the analysts' concerns about Microsoft's Azure, which missed expectations for revenue growth last quarter. But Wall Street should be more patient because AI is very new, and the return on investment will come over time. Still, there were bright spots in the earnings report: Gross, operating, and net profit margins were all better than expected. Cash flow was solid as well, especially considering the higher operating costs that accompany supporting these cloud and AI offerings. Early investments in ChatGPT creator OpenAI gave Microsoft the first-mover advantage in the AI race. Utilizing the startup's industry-leading tech allowed Microsoft to roll out innovative services like its virtual AI assistant Copilot. The tool can be added to Microsoft's legacy software and productivity apps like Word and Excel for a monthly cost, thus raking in another recurring revenue stream. Earlier this year, Microsoft also unveiled a series of new PCs equipped with advanced AI chips that improve battery life. While demoting Microsoft to fourth among top megacaps we own, D.A. Davidson analysts praised Amazon, Meta, and Apple as their top three. That's welcomed news for the Club because it indicates that our portfolio names have made positive strides in leveraging AI. AMZN YTD mountain Amazon YTD In particular, D.A. Davidson pointed out that Amazon Web Services has recently added nearly as much net new cloud business as Microsoft's Azure. The analysts consider this a "notable shift after a few quarters where Azure outperformed AWS in cloud growth, suggesting that AWS has effectively closed the gap." They said the shift is "likely driven by its massive scale and continued investment in AI services/capabilities." These investments include spending to develop AI assistant Amazon Q and machine learning platforms Bedrock and SageMaker. "AWS customers are now beginning to find feature parity between both AWS and Azure in terms of their generative AI offerings, which may lead to a reduced incentive for customers to switch," D.A. Davidson said. Similar to D.A. Davidson, Jim touted Amazon's AI strides as well. Amazon has "always been a user of AI and the company is brilliant and inferring what you need," he wrote Sunday. "Amazon is a pure winner." META YTD mountain Meta Platforms YTD As for Meta, the Club sees potential in how AI helps boost user engagement with its chatbot baked into Facebook, WhatsApp and Instagram. The more time users devote to these platforms the more advertising market share the social media giant can grab. "Meta Platforms can get you the right ads, designed by them, that will make it hard to consider advertising with anyone else," Jim wrote. AAPL YTD mountain Apple YTD Apple has been a battleground, with more conflicting analysts' accounts on Monday about how early sales of the new AI-ready iPhone 16 are going. Jim said in his interview last week with T-Mobile CEO Mike Sievert that the debate should put to rest. "[Sievert] could have easily said that things were as good as last year. He didn't. He said that things were much better ." The AI features on the iPhone, called Apple Intelligence, were delayed and that's why there are questions about whether the new device is going to spark the huge upgrade cycle. We still see big refresh demand coming but more spread out. The bottom line is that overall only time will tell how this AI race plays out. But, what we do know is that there can be more than one winner. (Jim Cramer's Charitable Trust is long ee here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. Adam Gray |

Microsoft is no longer the only game in town in generative AI. That's OK because competition is healthy.