Ever heard the phrase “The Next Big Thing”? Well, Artificial intelligence (AI) embodies that sentiment completely, at least for certain tech giants.
When it comes to AI, companies like Nvidia (NVDA) and the chip manufacturer Taiwan Semiconductor Manufacturing (TSM) usually steal the spotlight. The latter predicts a staggering 50% compound annual growth rate in AI revenue for the next five years, foreseeing AI contributing more than 20% to its revenue by 2028.
But what about the unsung heroes in the Age of AI? Companies that utilize AI effectively are poised for success, while others may lag behind.
One notable frontrunner in this realm is Microsoft (MSFT).
Microsoft’s Strategic AI Leverage
Microsoft is already reaping the benefits of AI, particularly through its cloud computing arm, Azure. Azure empowers enterprises to train their AI models, propelling Microsoft’s revenue forward.
In a notable display of strength, Microsoft’s cloud division witnessed a 21% revenue surge in the latest quarter, reaching $26.7 billion – surpassing analysts’ predictions and the company’s own guidance. Azure revenues specifically soared by 31% year-over-year, outstripping Wall Street’s 28% consensus.
Of this growth, 7 percentage points stemmed from AI products, demonstrating a steady increase from the past few quarters. Yet, Microsoft grapples with capacity constraints, as indicated by CFO Amy Hood during the earnings call, citing higher AI demand than current capacity.
Consequently, Microsoft plans to significantly boost its capital expenditure in the upcoming years. The company expects quarterly capex to exceed $60 billion in the 2025 fiscal year, more than double the $28.1 billion spent in the year leading to June 2023.
One Microsoft flagship to monitor closely is the 365 Copilot generative AI assistant, integrated into its suite of productivity apps. Although the sales figures remain undisclosed, Copilot, priced at $30 per user per month for businesses, boasts an accelerated adoption rate among nearly 60% of Fortune 500 companies, according to Microsoft’s chair and CEO, Satya Nadella.
Moreover, Microsoft’s GitHub platform is gaining traction, welcoming 1.8 million customers in the latest period compared to 1.3 million in the previous quarter. This AI-driven coding assistant, fueled by OpenAI’s large language model (LLM), aids developers in code prediction, query responses, and language conversion.
Potential in MSFT Stock
The current forward price/earnings (P/E) ratio of 31 for Microsoft stock, compared to 21 for Meta Platforms (META) and 22 for Alphabet (GOOGL), underscores the market’s conviction that MSFT is leading the AI race.
Microsoft’s proactive strategy in securing an early lead in generative AI, marked by its $13 billion investment in OpenAI, sets it apart. Additionally, recent investments in the European AI startup Mistral and hiring staff from AI competitor Inflection highlight Microsoft’s commitment to AI advancement.
Brad Sills, a research analyst at Bank of America (BAC), succinctly captures Microsoft’s prowess, noting that Azure is the sole software entity presently reaping AI benefits, positioning Microsoft as a frontrunner in this transformative space.
Street estimates peg Microsoft’s annualized revenue from generative AI around $4 billion. Microsoft’s significant edge lies in its vast user base of over 400 million Office 365 users, solidifying its position as a key enterprise software provider.
Microsoft’s future roadmap appears focused on establishing a new computing interface for AI, streamlining the flow of AI tools – a strategic move reminiscent of how Windows became the go-to platform for office computing.
In essence, Microsoft stands as a formidable player in the tech landscape, armed with a comprehensive product suite for enterprise efficiency, cloud transformation, collaboration, and business intelligence. With a sizable customer base, robust finances, and a cohesive product lineup, Microsoft is primed for success.
Considering all these factors, MSFT stock presents an attractive opportunity below the $420 mark.
