One of the biggest barometers of the artificial intelligence (AI) revolution is Microsoft (NASDAQ: MSFT). The Windows developer kicked off AI mania following a sizable investment in OpenAI in January 2023.
OpenAI is the maker of ChatGPT, a popular large language model (LLM) capable of writing essays, producing software code, and even generating images based on text prompts.
Unpacking Microsoft’s Success Story
Over the last year and a half, Microsoft has integrated ChatGPT’s functionality across its ecosystem — from workplace productivity tools, social media platforms, and cloud computing.
Microsoft recently reported earnings for its third quarter of fiscal 2024, ended March 31. There was a lot of optimism sprinkled throughout the earnings report, and advancements in AI were front and center.
Microsoft’s Business Mastery
Microsoft is an absolute behemoth. In addition to its main growth engine in Azure cloud computing services, the company also operates across gaming, social media, and personal computing.
For the three months ended March 31, Microsoft’s revenue grew 17% year over year to $61.9 billion. Revenue from Microsoft Cloud clocked in at $35.1 billion, representing an increase of 23% year over year.
What makes Microsoft such a compelling business is that revenue and profits are both soaring. By expanding its margins, Microsoft has impressive financial flexibility. At the end of the quarter, the company held $80 billion of cash and equivalents on the balance sheet.
Copilot: Microsoft’s Hidden Gem
During the earnings call, Microsoft CEO Satya Nadella proudly told investors that “Microsoft Copilot and Copilot stack … are orchestrating a new era of AI transformation.”
Microsoft Copilot is a smart assistant that is becoming increasingly integrated throughout Microsoft’s ecosystem. The underlying idea is that in just about every service Microsoft offers, more and more AI-powered features are becoming available.
In fact, Microsoft has 30,000 Copilot users as of March 31 — an increase of 175% quarter over quarter. Microsoft Copilot has penetrated approximately 60% of the Fortune 500 and boasts customers such as Nvidia, Novo Nordisk, and Amgen.
A Premium Valuation with Endless Potential
Microsoft currently trades at a forward price-to-earnings (P/E) of 35.6. This is above many of its megacap tech peers, and is much higher than the S&P 500’s forward P/E of 20.7.
The chart should shed some light as to why Microsoft stock trades at a premium. The analysis illustrates Microsoft’s total return over a long-term horizon against a cohort of both megacap AI stocks and other large technology behemoths that were once considered some of the most innovative technology businesses.
Microsoft is the best-performing stock in this peer group. Moreover, considering the momentum the company is witnessing thanks to its AI ambitions, I think even further gains are on the horizon.
I think scooping up shares of Microsoft right now will be a good decision in the long run. The company has a proven history of generous shareholder returns, and has outperformed its competition by a hefty margin.
Microsoft – A Blue-Chip Growth Story
The Unwavering Growth
Microsoft, often hailed as a blue-chip business, continues to impress with its steady revenue growth and robust cash flow. The company, while established, is still very much in a growth phase, a rarity in the corporate world.
A Rare Combination
The melding of consistent top- and bottom-line growth, coupled with a new frontier of expansion driven by artificial intelligence, sets Microsoft apart. This unique blend of stability and innovation has earned Microsoft its premium valuation, making it a stock that investors can confidently hold for the long haul.
Historical Precedent
Reflecting on history, back to April 15, 2005, when Nvidia debuted on a similar list, investing $1,000 then would have yielded a staggering $566,624. This anecdote serves as a testament to the immense potential that certain carefully selected stocks can unleash over time.
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