Below-Expected Azure Growth Hurt Microsoft's (MSFT) Performance in Q4

Sustainable Growth Advisers (SGA), an investment management company, released its fourth-quarter investor letter for its “U.S. Large Cap Growth Strategy.” A copy of the letter can be downloaded here.  In Q4 2025, the Portfolio returned 0.3% (Gross) and 0.2% (Net) compared to 1.1% return for the Russell 1000 Growth Index and 2.7% gain for the S&P 500 Index. Rising volatility, coupled with broadening market leadership, improved the portfolio’s relative performance in the second half of the quarter. In 2025, the Portfolio faced its most challenging years since the firm's inception in 2003. After a challenging year, the firm is encouraged by the robust growth potential in its portfolio and its historically attractive relative valuation. Progressing further, the portfolio is well-positioned to gain from a shift away from high momentum dynamics in U.S. markets and a broadening of market leadership. Please review the Strategy’s top five holdings to gain insights into their key selections for 2025.

In its fourth-quarter 2025 investor letter, SGA U.S. Large Cap Growth Strategy highlighted stocks like Microsoft Corporation (NASDAQ:MSFT). Microsoft Corporation (NASDAQ:MSFT) is a multinational software company that develops and supports software, services, devices, and solutions. The one-month return of Microsoft Corporation (NASDAQ:MSFT) was -11.04%, and its shares gained 1.77% of their value over the last 52 weeks. On February 9, 2026, Microsoft Corporation (NASDAQ:MSFT) stock closed at $413.71 per share, with a market capitalization of $3.09 trillion.

SGA U.S. Large Cap Growth Strategy stated the following regarding Microsoft Corporation (NASDAQ:MSFT) in its fourth quarter 2025 investor letter:

"Microsoft Corporation (NASDAQ:MSFT), a global leader in enterprise software and cloud services, was a detractor during the quarter, despite an overall solid quarterly report. Azure growth of 39% came in slightly below expectations, and guidance for the next quarter was weaker than expected, which management asserted was due to supply constraints.

The company’s partnership with OpenAI has accelerated investments in infrastructure and the ultimate return on these investments remains difficult to quantify. At the same time, the adoption of Copilot has been lackluster, and Microsoft remains dependent on OpenAI for the core AI features. In our view, the returns on the infrastructure investments should be exciting over time. We also remain confident that Microsoft can develop the LLM expertise in-house or partner with other companies as OpenAI is unlikely to maintain the level of dominance it has had thus far in the AI journey.

Microsoft’s business model is anchored by substantial pricing power, high switching costs, and a growing base of recurring revenues as more products transition to cloud and Software-as-a-Service models. While elevated capital expenditures and evolving market dynamics present challenges, Microsoft’s strong customer base, leadership in cloud and AI, and disciplined execution position it well for double-digit earnings and revenue growth as the benefits of these investments materialize. We maintained an above-average weight position."

Microsoft Corporation (NASDAQ:MSFT) is in the second position on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 312 hedge fund portfolios held Microsoft Corporation (NASDAQ:MSFT) at the end of the third quarter compared to 294 in the previous quarter. While we acknowledge the potential of Microsoft Corporation (NASDAQ:MSFT) as an investment, we believe certain AI stocks offer greater upside potential and carry less downside risk. If you're looking for an extremely undervalued AI stock that also stands to benefit significantly from Trump-era tariffs and the onshoring trend, see our free report on the best short-term AI stock.

In another article, we covered Microsoft Corporation (NASDAQ:MSFT) and shared AI stocks analysts are watching. In addition, please check out our hedge fund investor letters Q4 2025 page for more investor letters from hedge funds and other leading investors.

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Disclosure: None. This article is originally published at Insider Monkey.