Pershing Square Inc. on Microsoft Corporation
Thesis
Pershing Square believes Microsoft is uniquely positioned to monetize artificial intelligence through two complementary channels: Microsoft 365 and Azure. Azure revenue growth accelerated to 48% in the most recent quarter, while Microsoft 365 growth reached 18%, demonstrating accelerating momentum across its core franchises. Paid Microsoft 365 Copilot adoption doubled over six months to more than 30 million seats, while agentic coding has accelerated GitHub Copilot revenue growth. Microsoft's ability to combine enterprise distribution, proprietary AI models, custom silicon, cloud infrastructure, and security capabilities creates substantial competitive advantages. The fund believes Microsoft can sustain approximately 19% annual EPS growth over the next three to five years, supported by AI adoption, enterprise cloud demand, and operating leverage. Despite the stock's valuation expanding from 19 to 25 times forward earnings, Pershing Square believes the market continues to underestimate AI's contribution to Microsoft's future growth and customer entrenchment.
“We believe Microsoft’s current valuation understates the degree to which AI will accelerate Microsoft's growth and deepen its entrenchment with customers.”
Key risks
- The substantial increase in AI infrastructure capital expenditures may not generate the anticipated revenue growth, returns on invested capital, or free cash flow.
- Enterprise AI adoption and Copilot monetization may develop more slowly than expected despite recent improvements in paid-seat adoption.
- Elevated capital intensity could persist for years without corresponding revenue acceleration, undermining the fund's valuation assumptions.
- Data center expansion depends on access to power, permitting, semiconductor supply, and infrastructure capacity, potentially delaying expected investment returns.