DA Davidson: The market severely "misprices" the AI cycle, Microsoft is more deserving of the "AI crown" than Google.

D.A. Davidson's technology research director Gil Luria stated on Monday that the technology sector is being distorted by extreme valuation "dislocation," with the pricing of some semiconductor and mega-scale cloud service stocks seemingly reflecting the AI boom expected to continue until 2030, while other stocks are being priced by the market as if the AI cycle is currently peaking. "Is the AI cycle really peaking now or will it continue until 2030? This is a very difficult question to answer," Luria said. Instead of trying to determine the cycle turning point, he focuses more on identifying areas where the market is generating significant valuation differences for comparable companies. The valuation gap between storage chips and CPUs is particularly significant. Semiconductor equipment manufacturers and optical device companies are being priced by the market as if AI infrastructure construction will continue for several years, while the trends of stocks like Micron (MU.US) and NVIDIA Corporation (NVDA.US) seem to be signaling the end of the AI cycle. The data is striking: Micron currently has a P/E ratio of only 8 to 9 times, while CPU-related stocks have P/E ratios as high as 40 to 50 times. Luria believes that this pricing logic is fundamentally flawed. "If the AI cycle really continues until 2030, Micron's current valuation could have nearly quadruple upside," he said. "The strategic importance of storage chips in the current market has surpassed that of CPUs, and the competition in the storage market is much less intense than that in the CPU market. Therefore, this is a very significant valuation deviation, and we believe it is currently the biggest investment opportunity." He also pointed out that Intel Corporation (INTC.US) and Cerebras (CBRS.US) can only support their current valuations if the AI cycle continues for five years - if the cycle shifts now, the fair value of these two companies will be far below the current trading prices. Similar valuation discrepancies are also present in the camp of mega-scale cloud service providers. While the market is tolerant of Alphabet Inc. Class C and Amazon.com, Inc.'s AI capital expenditures, Microsoft Corporation is being punished for similar capital expenditures. Ironically, Luria pointed out that Microsoft Corporation has 50% more AI compute orders than Alphabet Inc. Class C, which means that its actual sales of AI infrastructure far exceed those of Alphabet Inc. Class C. However, Microsoft Corporation has just experienced its worst single monthly performance in nearly two decades, while Alphabet and Amazon.com, Inc. have seen gains during the same period. "The pendulum has swung too far in favor of crowning Alphabet Inc. Class C as the AI winner and denigrating Microsoft Corporation as the loser," Luria said. "In fact, both are winners." A year ago, the situation was quite the opposite - Alphabet Inc. Class C had a P/E ratio of about 18 times, while Microsoft Corporation had a P/E ratio of 30 times. Now, the market has overcorrected. Luria also refuted the viewpoint that Microsoft Corporation's software business faces an existential threat from AI. He believes that Microsoft Corporation is being punished for its overly aggressive AI spending, while at the same time being labeled and priced by the market as a "traditional software company that will be disrupted by AI". "We all know that five years from now we will still be using Outlook, Teams, Word, and PowerPoint - AI intelligence will also use these tools," he pointed out. Microsoft Corporation's enterprise software has strong user stickiness. "But the current stock price trend of Microsoft Corporation seems to be that of a software company that will be eliminated by AI."