Microsoft(NASDAQ: MSFT) has witnessed an extraordinary surge over the past year, driven by a broader market resurgence and a significant recovery in the technology realm. Surpassing the S&P 500’s gains, Microsoft shares have skyrocketed by 63%, propelling its market cap above $3 trillion as of the start of 2024, anointing it as the most valuable company globally.
What sets this ascension apart is Microsoft’s early adoption of generative artificial intelligence (AI), a move that has played a pivotal role in its growth trajectory. However, as the rally marches on, some investors remain hesitant to join the exuberant run, cautious of the volatility often associated with AI stocks.
For those who opted out of Microsoft’s upward trajectory, the burning question remains – is it too late to jump on the bandwagon in anticipation of further upswings, or is the stock’s current valuation a deterrent? Let’s delve into the facts and unveil the underlying truths.
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The AI Engine Accelerating Growth
AI’s impact has been undeniable so far, with tech giants across the globe diving headfirst into this realm. While the full extent of AI’s potential remains unknown, it is evident that there is a vast opportunity for enterprises with the expertise and resources to leverage it – and Microsoft is leading the charge.
Shortly after acquiring a significant stake in ChatGPT parent OpenAI, Microsoft shocked the tech industry with the launch of Copilot – a suite of AI assistants deeply integrated into Microsoft Office products to enhance user productivity. Copilot excels in various tasks such as email summarization and response drafting in Outlook, presentation creation in PowerPoint, pivot table generation in Excel, and document drafting and review in Word. Not just limited to Office, Copilots cater to developers, sales teams, medical practitioners, cybersecurity professionals, and beyond. Users have highlighted a significant surge in productivity since its introduction.
While it is early days, projections are staggering. CFO Amy Hood anticipates that “The next-generation AI business will be the fastest-growing $10 billion business in our history.” Estimates from Third Point’s founder Dan Loeb propose that Copilot could boost Microsoft’s revenue by over $25 billion, whereas Evercore ISI analyst Kirk Materne envisions generative AI contributing an incremental $100 billion to Microsoft’s revenue by 2027.
Let’s not overlook Microsoft Azure, the tech giant’s cloud computing arm. As the world’s second-largest cloud infrastructure provider, Microsoft is superbly positioned to offer cloud-based AI services to its clientele. In the second quarter of fiscal 2024 (ending Dec 31), Azure exhibited a 30% year-over-year growth, outstripping Amazon Web Services (AWS) and Alphabet’s Google Cloud, which reported growth rates of 13% and 26% respectively. Microsoft highlighted that Azure’s growth included “six points of growth from AI services.”
Beyond AI: Diversified Growth Prospects
In the yesteryears, Microsoft’s personal computing segment constituted around one-third of its revenue. However, this segment endured a downturn in recent times due to a sharp decline in PC sales.
The tide seems to be turning as the global PC market notched up 3% growth year over year in the final quarter of 2023, as per tech analyst firm Canalys. The anticipated economic boom is expected to trigger a refresh cycle commencing slowly in 2024 and gaining momentum in 2025. This resurgence could potentially propel Microsoft’s fortunes, revitalizing the PC segment to its former stature.
Assessing Microsoft Stock’s Viability
While Microsoft stock was once deemed a promising buy not long ago, its meteoric rise in the past year has pushed its valuation higher. Presently trading at 35 times forward earnings, compared to the S&P 500’s approximately 28 price-to-earnings (P/E) ratio, some might find it expensive. However, given the company’s growth prospects, this valuation seems reasonable and could justify a modest premium.
Considering the diverse avenues through which Microsoft can capitalize on the AI revolution and other growth catalysts, it seems the window of opportunity to invest in Microsoft stock has not closed just yet.
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This unyielding ascent leaves investors pondering: is it time to invest in Microsoft stock or watch from the sidelines? For those who believe in riding the wave of innovation and technological prowess, Microsoft presents an intriguing opportunity to participate in the unfolding tech renaissance.