Microsoft was among the hot stocks on Yahoo Finance's Trending Tickers page after D.A. Davidson downgraded the tech giant. D.A. Davidson managing director Gil Luria joins Madison Mills and Seana Smith on Catalysts to discuss artificial intelligence (AI) competition among big tech companies.

Luria tells Yahoo Finance that Microsoft (MSFT) "had a big head start because they were involved with OpenAI for a long time. They knew ChatGPT was coming before everybody else. They knew that they were going to commercialize it. So about a year and a half ago, they came out with a whole set of commercial products around AI that gave them a big lead over Amazon (AMZN) and Google (GOOGL, GOOG) who were both caught flat-footed.”

“Since then, Amazon and Google, [Amazon Web Services (AWS)] and [Google Cloud Platform (GCP)], respectively, have invested in catching up to Microsoft, and we think that you can start telling that they've caught up, both in terms of the results they've reported and the conversations we're having with industry participants tell us that their capabilities are now comparable to Azure's, thus diminishing the lead.”

“Going forward, we think AWS and GCP have an advantage over Azure because they have the capability to deploy their own chips into their data centers, which are a fraction of the cost of an Nvidia GPU, something that Microsoft has yet to do with its own chips.”

He says, “Microsoft is so reliant on Nvidia that it's almost transferring wealth from its own shareholders to Nvidia's (NVDA) shareholders. Their over-investment right now creates a point of margin headwind every year they over-invest, meaning Microsoft has to lay off 10,000 people just to keep its margins flat because of how much it's over-investing in building this infrastructure, using the most expensive chips, which are Nvidia GPUs.”

“I'd say we're just at a point where they both [Nvidia and Microsoft] can't both win. Either Microsoft continues to over-invest in Nvidia GPUs, in which case Nvidia wins, but Microsoft has diminishing margins, or it slows down that rate of investment.”

He says “the cooling down of investment” could lead him to change his view on Microsoft. “If they go back to a steady state of investment and expand data centers, but not at this exponential rate, that would take away that margin and headwind and position Microsoft for much faster earnings growth... if Microsoft actually cools off its investment, margins will grow, and they won't really sacrifice any revenue growth.”

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This post was written by Naomi Buchanan.