Why Microsoft is spreading its AI bets to PCs

Microsoft CEO Satya Nadella. Microsoft’s early lead in AI now has the company feeling bold enough to challenge even Apple on its home turf. (File Photo: AFP)
Microsoft CEO Satya Nadella. Microsoft’s early lead in AI now has the company feeling bold enough to challenge even Apple on its home turf. (File Photo: AFP)


The software giant’s stock has lagged behind peers as investors worry about AI’s costs—and time to payoff.

Microsoft has come a very long way from depending on personal computers for its livelihood. But the world’s most valuable company needs all the help it can get these days.

The software giant kicked off its annual Build developers conference this week with a focus on hardware. The wares on display were mostly new versions of the company’s Surface laptops and tablets designed with generative artificial-intelligence capabilities on the device. The new machines also use Qualcomm’s Snapdragon processors and an optimized version of Windows that together are designed to perform powerful AI-computing functions with smartphonelike battery life.

Microsoft’s early lead in AI now has the company feeling bold enough to challenge even Apple on its home turf.

“We’re going to outperform them," Microsoft CEO Satya Nadella told The Wall Street Journal of his expectation for the new Surface devices against Apple’s Mac computers.

It is a tall order. Apple sold nearly $30 billion of Macs in the 12-month period that ended in March. Microsoft generated less than $5 billion in device revenue over the same period.

But Microsoft’s main mission these days is to get its AI assistant, known as Copilot, in front of as many users as it can. It is already doing so by adopting the technology across its powerful base of enterprise software services. But that can also be a slow process—one that depends on big companies’ signing major deals to deploy the Copilot tool and drive its use. Google, by contrast, told its own developers conference last week that it will be embedding its Gemini AI tool directly into its search engine, which powers more than 90% of the world’s internet searches.

The stock of Google’s parent, Alphabet, has risen 5% since that conference, bringing its year-to-date gain to 27%. Meanwhile, Microsoft’s shares picked up less than 1% on Tuesday following the opening keynote of its Build conference, paring a nearly 2% morning gain ahead of the event. The stock is lagging behind its archrival’s year-to-date gain by more than 10 percentage points.

Microsoft is still worth about $3.2 trillion, which is about $1 trillion more than Google’s parent. The stock is also trading at a rich valuation of nearly 34 times forward earnings—17% above its five-year average and 47% over Alphabet’s multiple, according to FactSet data. Microsoft’s shares enjoyed a strong lift this past year following its aggressive move into AI, which included a close partnership with OpenAI.

But investors have become increasingly worried about the rising capital expenditures needed to power AI services and the potentially slow payoff those services can generate for tech giants whose existing businesses rival the gross domestic product of midsize countries. In a report over the weekend, Bernstein software analyst Mark Moerdler predicted that the first wave of generative AI deployment “will center around incremental functionalities for existing apps" such as Microsoft Office.

“More transformative, custom, and industry-centric apps would be part of a second wave, which could be out at least 1-2 years in the future," he wrote.

Hence, Microsoft will do whatever it can to give Copilot more lift now, and that won’t stop with its own devices. The PC makers Dell Technologies, HP, Lenovo Group and others also are embracing on-device AI for their Windows-powered machines, with major launches coming later this year. In a note Tuesday, Vivek Arya of BofA Securities projected that annual sales of AI-enabled PCs will hit 127 million in 2027—a big number considering zero were sold last year.

One would hope Microsoft’s AI assistant knows how to sell itself.

Write to Dan Gallagher at dan.gallagher@wsj.com

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