Yesterday, we talked about the latest Consumer Electronics Show (CES).

Companies introduced new processors and AI tools designed to change how businesses and consumers use technology.

The event also saw major partnerships focused on improving AI models and infrastructure, showing how collaboration is helping drive progress.

As more industries adopt AI, the need for stronger computing power and better technology keeps growing, keeping companies leading in AI development in the spotlight.

Microsoft (MSFT) has announced its plans to invest $80 billion in data centers during its fiscal year 2025.

The investment will focus on expanding the infrastructure needed to handle the massive computing power AI demands.

Microsoft’s Vice President Brad Smith explained that this level of spending is necessary to support AI advancements, as the technology requires specialized, large-scale data centers to function effectively.

More than half of the spending will be in the United States, expanding Microsoft’s presence domestically.

The company has already seen rising demand for data center capacity through partnerships with OpenAI, Anthropic, and xAI.

One of the biggest parts of Microsoft’s AI investment is working with OpenAI.

The company moved into the third phase of this partnership with a huge investment that spans several years and billions of dollars.

The partnership started with Microsoft investing $1 billion in 2019 to help OpenAI work on creating advanced AI that could do a wide range of tasks as well as or better than humans.

Its own AI-powered platforms and services, like Azure’s AI tools, have also shown the need for a larger infrastructure to support growth.

These developments show that Microsoft is confident in making money out of AI, and we have only seen the tip of the iceberg.

This investment is not just about Microsoft. Major data center suppliers like Nvidia (NVDA) and Advanced Micro Devices (AMD) will likely benefit as well.

Both companies supply high-performance GPUs essential for AI workloads, and the scale of Microsoft’s spending points to increased demand for their products.

The market responded immediately, with Nvidia and AMD shares rising 4% and 3%, respectively, after the announcement.

The market also expects Microsoft to perform much better in the future and our EEA model clearly shows this.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market predicts that the company’s Uniform return on assets ‘‘ROA’’ will rise to around 42% from 35% last year.

However, even this positive expectation can be conservative.

Beneath the surface, Microsoft’s $80 billion spend suggests the company believes AI will be much more profitable than it currently appears.

If successful, Microsoft could see much stronger earnings power as its AI investments start delivering results.

This strategy positions Microsoft not just as a software company but as a major infrastructure provider for the future of AI.

Building the physical backbone for large-scale AI operations allows Microsoft to maintain control over the tools and services driving this next phase of technological growth.

It’s not just about keeping up with competitors, Microsoft is committing to play a foundational role in how AI technology scales globally.

This level of spending also signals a shift in the tech landscape. As AI becomes more complex, companies need infrastructure on a scale that few can match.

The company is betting that controlling this infrastructure will be key to long-term leadership in the space.

Microsoft could see stronger profitability than market prices in the years ahead as its AI investments begin to pay off.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

This portfolio analysis highlights the same insights we share with our FA Alpha Members. To find out more, visit our website.