Microsoft (NASDAQ:MSFT) started in 1975 as a software company. Its flagship operating system, Windows, is still used by billions of people around the world despite being founded in 1985. But the company has expanded far beyond its roots and now has a strong presence in industries such as cloud computing, gaming and artificial intelligence (AI).
Microsoft bet on AI in early 2023 when it announced plans to invest $10 billion in ChatGPT developer OpenAI. Since then, the company has integrated the startup’s technology across its entire product portfolio, bringing AI to millions of customers worldwide.
The partnership is already delivering financial benefits to investors and is one of the key reasons why Microsoft is now the most valuable company in the world with a market capitalization of $3 trillion. However, that doesn’t mean it’s too late to invest in the company’s stock – when you look back in five years, you’ll probably be glad you made the move today.
AI could be Microsoft’s most valuable opportunity of all
The AI industry is still in its infancy, and yet Wall Street analysts already believe it has enough potential to contribute between $7 trillion and $200 trillion to the global economy over the next decade. AI chatbots can quickly generate text, images, videos and even computer code, which could lead to a productivity boom across the corporate world.
Understandably, thousands of companies are looking to integrate AI into their operations. Microsoft is at the forefront of this push and has already successfully and measurably monetized the technology
Using a combination of proprietary models and OpenAI’s latest GPT-4, Microsoft has developed an AI assistant called Copilot. It is already available in products such as Windows, the Edge internet browser, the Bing search engine and the Office 365 suite (Word, Excel and PowerPoint).
In the third quarter of fiscal 2024 (ended March 31), Microsoft said 60% of Fortune 500 companies were using Copilot for 365, including giants like Amgen, CognitiveAnd Nvidia Each buys over 10,000 seats. This is a huge financial opportunity for Microsoft as there are more than 400 million existing 365 licenses that could add Copilot to their plans by paying an additional fee.
Copilot for applications like Windows, Edge and Bing offers Microsoft a different opportunity. Finding information from an AI chatbot is far more convenient than using a traditional search engine like Google, which forces the user to scour web pages for answers. So if Microsoft can generate enough traffic through the above-mentioned applications, there may be an opportunity to create new revenue streams by selling commercials.
The cloud continues to shine, led by Azure and AI
Microsoft generated revenue of $61.9 billion in its fiscal third quarter, up 17% from a year earlier and well above Wall Street’s forecast of $60.8 billion. Intelligent Cloud remained the largest of Microsoft’s three core businesses and its revenue rose 21% to $26.7 billion.
Azure is Microsoft’s cloud computing platform and provides businesses around the world with hundreds of solutions to help them operate in the digital age. A growing number of these solutions revolve around AI.
Microsoft is investing heavily in building a data center infrastructure equipped with the latest graphics processing chips (GPUs) from manufacturers like Nvidia, giving developers the computing power they need to build, train and deploy AI models.
The company has also developed the Azure OpenAI Service to give enterprises access to the most advanced pre-built AI models, including GPT-4, DALL-E and even Llama, developed by Metaplatforms. They can help accelerate the development of customer-focused AI applications and save companies countless time and financial resources. According to Microsoft, 65% of the Fortune 500 used the Azure OpenAI service in the third quarter.
Azure (which operates in the Intelligent Cloud segment) reported 31% revenue growth in its most recent quarter, its fastest growth in more than a year. This growth included a contribution of 7 percentage points specifically from AI, up from 6 points just three months earlier. Put simply, AI is already clearly adding value to Microsoft’s cloud business, and this opportunity is only just beginning to emerge.
$3 trillion doesn’t have to be a stopping point for Microsoft
To accompany the strong revenue growth, Microsoft also carefully managed its costs, delivering a 20% year-over-year increase in earnings per share in the quarter. With fiscal 2024 ending in June, Wall Street analysts expect the company to report total earnings of $10.99 per share.
Based on Microsoft’s current share price of $406.66, its price-to-earnings (P/E) ratio is 37, which represents a significant premium to that Nasdaq-100 The technology index’s forward P/E ratio is 26.
However, there’s a reason investors are willing to pay up to own a share of the world’s largest company. The company has gained an early lead in the AI space and is poised to capture much of the incredible economic impact this technology could have in the coming years. Additionally, because Microsoft operates in so many industries that serve both consumers and businesses, it will likely find new ways to monetize AI that analysts haven’t even thought of yet.
Stock in a quality company like Microsoft tends to seem cheaper the further into the future you look. Investors with a long-term time horizon should therefore end up feeling very happy that they bought today, especially when they think back to this moment in five years.
Where can you invest $1,000 now?
When our team of analysts has a stock tip, it might be worth listening. After all, the newsletter they have been publishing for two decades is Motley Fool Stock Advisorhas more than tripled the market.*
They just revealed what they think it is The 10 best stocks for investors to buy now… and Microsoft made the list – but there are 9 more stocks you might be overlooking.
Check out the 10 stocks
*Stock Advisor returns as of April 30, 2024
Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms, Microsoft and Nvidia. The Motley Fool recommends Amgen and Cognizant Technology Solutions and recommends the following options: long $395 January 2026 calls on Microsoft and short $405 January 2026 calls on Microsoft. The Motley Fool has a disclosure policy.
When you look back in five years, you’ll wish you had bought this $3 trillion artificial intelligence (AI) stock originally reported by The Motley Fool