While most people know Microsoft (MSFT 0.60%) for its software and its services, the tech giant also manufactures various hardware products, including its own branded keyboards. Recently, the company announced it would be altering its keyboard in a significant way for the first time in 30 years.
Microsoft is adding a new key to the keyboard that will allow users to launch its Windows Copilot, Microsoft's artificial intelligence (AI) assistant. Effectively, Microsoft is hoping to use the modified keyboard to differentiate its brand and lead consumers to look at its computer hardware as an AI PC.
Despite the hype about the seemingly big change, investors shouldn't get too excited about this recent development.
The modification seems a bit gimmicky
AI is touted as being intuitive and smart. That leads to the obvious question: Why is a new key even necessary? Shouldn't Microsoft's Copilot know when it's needed and just pop up (the way Clippy, Microsoft's first attempt at a computer assistant, did) and offer suggestions when it saw you were writing a memo or resume? I'm being a bit facetious here (Clippy was a huge failure for Microsoft in the late 1990s), but there is a point to my complaint and a connection to the investing thesis around this stock.
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There have been several changes in technology over the years that might have warranted a keyboard change. From the emergence of email to the rising popularity of instant messaging and social media, Microsoft didn't feel the need to tweak the keyboard in this way. Why now?
The obvious answer is that the company is hoping to promote a new service it's offering to its clients in Copilot. But Microsoft's Copilot likely doesn't need a new key to awaken it. There is probably also some effort here to convince investors of its strong intentions regarding AI. This reason is more defensible, if a bit gimmicky.
Why Microsoft could be an underwhelming AI stock
It's easy to see why Microsoft might want to position itself as an AI stock, as that was a hot investing theme of 2023. However, investors should be careful not to overestimate the demand for Microsoft's Copilot. This service costs $30 per month, which is more than its Microsoft 365 business premium bundle. The latter costs $22 per user and includes desktop apps such as Word, Excel, PowerPoint, and Outlook.
It's not a cheap price for a service that can help users summarize meetings and compile information from emails, chats, and other files. Whether it's revolutionary enough to command a significant market share at a time when there are free AI services available is questionable. The integration with Microsoft's desktop apps is a key differentiator, versus using a web version of OpenAI's ChatGPT, but whether that's enough of a reason to justify the price tag is the big question.
While the company projects that AI could generate $10 billion in annual revenue for Microsoft, that's still a fairly modest chunk of the company's top line. Over the past four quarters, Microsoft's revenue has totaled $218 billion.
Microsoft is a good stock, but there are better options for AI investors
What makes Microsoft worth nearly $3 trillion is the strength and dominance of its other businesses. Microsoft Azure, Windows, Xbox, and the company's office suite of products are all examples of Microsoft's broad business and the different ways it can generate long-term growth. AI is definitely going to play a role in that, but investors should be careful not to overestimate its potential -- at least not yet.
Adding a key to its existing keyboard appears to be a way for Microsoft to help draw attention to its AI efforts, but there will be no shortage of competition in this new battleground. Amazon, Alphabet, and many pure-play AI stocks will be offering AI-related products and services, as well. While Microsoft has invested approximately $13 billion in ChatGPT-maker OpenAI, it's still in the early innings and far too early to tell which companies will come out on top as AI continues to evolve.
Is Microsoft stock a buy?
Microsoft is a safe long-term investment and can be a great option for retirees, but it's not a growth stock I would buy at today's inflated valuation. At nearly 38 times the company's trailing earnings, investors are paying a big premium for the business, which I don't believe is justified. It appears to me that investors may be overestimating the impact AI will have on Microsoft's business and justifying its valuation that way.
Until Microsoft proves that AI is going to be a massive game changer for its business, I'd consider buying other tech stocks instead.
