Microsoft (NASDAQ: MSFT) started as a software company in 1975. Its flagship Windows operating system is still used by billions of people around the world, despite launching way back in 1985. But the company has grown far beyond its roots and now has a major presence in sectors such as cloud computing, gaming and artificial intelligence (AI).
Microsoft embraced AI in early 2023 when it announced plans to invest $10 billion in ChatGPT maker OpenAI. It has since woven the startup's technology into its entire product portfolio, putting AI within reach of millions of customers around the world.
The partnership is already delivering financial benefits to investors, and it is a key reason 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 stock. When you look back five years from now, you'll probably be glad you took the plunge today.
AI could be Microsoft's most valuable opportunity ever
The AI industry is still in its infancy, and yet Wall Street analysts already think there is enough potential to add 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 drive productivity growth across the business world.
Understandably, thousands of companies are racing to integrate AI into their operations. Microsoft is at the forefront of this development and has already measurably monetized the technology.
Using a combination of its own internally developed models and OpenAI's latest GPT-4, Microsoft created an AI assistant called Copilot. It's already available in products like Windows, the Edge Internet browser, the Bing search engine, and the Office 365 suite (Word, Excel, and PowerPoint).
In the third quarter of 2024 (ending March 31), Microsoft said 60% of Fortune 500 companies used Copilot for 365, with giants like Amgen, InformedAnd Nvidia each buys more than 10,000 seats. This is a huge financial opportunity for Microsoft, as there are more than 400 million existing 365 seats that could add Copilot to their plans by paying an additional fee.
Copilot for applications such as Windows, Edge and Bing offers another opportunity for Microsoft. Searching for information through an AI chatbot is much more convenient than using a traditional search engine like Google, which forces the user to crawl web pages looking for answers. Therefore, if Microsoft can generate enough traffic through the aforementioned applications, there could 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 during its fiscal third quarter, up 17% year over year and well above Wall Street's forecast of $60.8 billion. Intelligent Cloud remained the largest of Microsoft's three core businesses, with revenue increasing 21% to $26.7 billion.
Azure is Microsoft's cloud computing platform, providing hundreds of solutions to businesses around the world to help them operate in the digital age. A growing number of those solutions revolve around AI.
Microsoft is investing heavily in building a data center infrastructure equipped with the latest graphics processing chips (GPUs) from the likes of Nvidia, which provide the computing power developers need to build, train and deploy AI models.
The company has also created Azure OpenAI Service to give companies 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-facing AI applications, saving companies countless amounts of time and financial resources. As of the third quarter, Microsoft said 65% of the Fortune 500 were using the Azure OpenAI Service.
Azure (which operates under the Intelligent Cloud segment) saw revenue growth of 31% last quarter, the fastest pace in more than a year. That growth included a 7 percentage point contribution from AI specifically, compared to 6 points just three months earlier. Simply put, AI is clearly already complementing Microsoft's cloud business, and this capability is only warming up.
$3 trillion doesn't have to be a stopping point for Microsoft
To accompany strong revenue growth, Microsoft also carefully managed its costs and delivered a 20% year-over-year increase in earnings per share during the quarter. With fiscal 2024 ending in June, Wall Street analysts expect the company to post total earnings of $10.99 per share.
Based on Microsoft's current share price of $406.66, that gives the company a price-to-earnings (P/E) ratio of 37, a significant premium to Microsoft's share price. Nasdaq-100 the forward price-earnings ratio of 26 on the technology index.
However, there is a reason why investors are willing to pay to own a piece of the largest company in the world. It built an early lead in the AI spaceand positions itself to capture a healthy share of the incredible economic impact this technology could deliver in the coming years. Furthermore, because Microsoft operates in so many industries and serves both consumers and businesses, it will likely find new ways to monetize AI that analysts haven't even thought of yet.
Shares in a quality company like Microsoft seem cheaper the further into the future you look, so investors with a long-term horizon should ultimately be very happy they bought in today, especially when they look back at this moment five years from now. .
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Randi Zuckerberg, former director of market development and spokeswoman 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 holds positions in and recommends Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends Amgen and Cognizant Technology Solutions and recommends the following options: long calls in January 2026 for $395 at Microsoft and short calls in January 2026 for $405 at Microsoft. The Motley Fool has one disclosure policy.
Five years from now, you'll look back and wish you had bought this $3 trillion artificial intelligence (AI) stock was originally published by The Motley Fool
