Motley Fool: AI investors look to add Microsoft

Research by PwC estimates that artificial intelligence (AI) will grow to contribute over $15 trillion to the global economy in 2030, so consider investing in Microsoft (Nasdaq: MSFT).

Thanks in large part to its multibillion-dollar investment in OpenAI (the organization behind ChatGPT), Microsoft has a foothold in the rapidly growing AI space – and it’s adding AI-powered features to many of its products.

Because Microsoft’s platform Azure is the cloud provider for all OpenAI’s computing needs, this could funnel a great deal of cloud activity to Microsoft as AI grows.

Meanwhile, Microsoft’s new Copilot acts as something of a coordination service, bringing together multiple AI systems in a single framework.

In a world where AI still tends to be best at specialized, well-defined tasks, Copilot’s integration could help streamline the interfaces for the humans who use those tools.

Even if investor enthusiasm for AI ends up creating a bubble, it’s likely that AI will eventually become part of our daily lives.

As a well-capitalized early mover with access to not only leading-edge AI technology but also key use cases for it, Microsoft seems positioned to thrive when AI becomes embedded in our lives.

That makes it a compelling candidate for the portfolios of long-term investors. (The Motley Fool owns shares of Microsoft and has recommended its stock and options.)

Ask the Fool

Q. How can I learn about a company’s risks? – R.S., Augusta, Georgia

A. Publicly traded American companies are actually required by the Securities and Exchange Commission (SEC) to detail their risks in the annual “10-K” reports they file with the SEC.

You can find 10-Ks at SEC.gov/edgar and often on companies’ websites, in their “Investors” (or “Investor Relations”) nooks. A 10-K report is a treasure trove of information, reviewing in detail the company’s operations and financial health, and listing many of the risks it faces.

The 2024 10-K from Walmart features 14 pages of “Risk Factors.” For example: “If we do not timely identify or effectively respond to consumer trends or preferences, it could negatively affect our relationship with our customers, demand for the products and services we sell, our market share and the growth of our business.”

And “Global or regional health pandemics or epidemics … could negatively impact our business, financial position and results of operations.”

Don’t let a long list of risks immediately drive you away from a stock, but do consider them carefully. Most companies face many risks and simply manage them well, perhaps by having insurance and various contingency plans.

Q. What’s “diluted” EPS? – L.L., Tacoma, Washington

A. On a company’s income statement, you’ll find its profit, or “net income,” near the bottom, where it will be divided by total share count to arrive at earnings per share (EPS).

The EPS can be reported in two ways: “basic” and “diluted.”

Basic EPS uses the number of shares that currently exist, while diluted EPS includes shares that might possibly exist – say, if people with stock options exercised them. It’s generally better to focus on diluted EPS, because it’s a more conservative figure.

My dumbest investment

My most regrettable investment move? I shorted shares of an S&P 500 index fund. – D.V., online

The Fool responds: It’s possible to build great wealth without ever shorting any security.

With shorting, instead of buying low and selling high, you aim to first sell high and then buy low.

For example, if you think shares of Alphabet City (ticker ABCDE) are overvalued and likely to fall, you’d have your broker borrow shares from someone else’s account and sell them. (This is legal and routine.)

Later, when the shares have fallen, you can buy them on the open market for less and replace them – pocketing a profit.

But stocks don’t always behave as expected. If the stock soars, you’ll have to replace the borrowed shares at some point – and pay much more than the money you pocketed when you shorted it.

When you buy stock the usual way, you can lose up to 100% of your money, but your upside is unlimited.

With shorting, you can only gain close to 100%, and your downside is unlimited if the stock keeps rising.

Meanwhile, when you bet against a company, you’ll have its management and employees working against your interests.

If you short the entire S&P 500, you’re essentially betting against the U.S. economy.

The market does pull back occasionally, but you can’t know exactly when it will. Think twice before shorting any securities.