The rapid advancements in artificial intelligence (AI) have significantly impacted various industries, making AI stocks appealing to investors seeking growth opportunities. Among the many contenders in this space, tech giant Microsoft (MSFT) has emerged as a key player with its robust AI capabilities. The company had an impressive start to fiscal 2024, with outstanding growth across all its segments.
Last year, the stock soared 57%, outperforming the tech-heavy Nasdaq Composite ($NASX), which rose 44.5%.
Of course, Microsoft has run a very successful business even before the AI rush took over. Its financial stability and consistent revenue growth made it an appealing investment over the years, driving its stock to returns of 926% over the last 10 years.
Nonetheless, I believe there is much more AI potential to be unlocked, and the stock could reach its Street-high target price of $600 this year.
The AI Potential of Microsoft
Founded in 1975, Microsoft has blossomed into a global tech titan that provides software, hardware, cloud computing, and other services.
Microsoft’s revenue has increased significantly over the last five years as a result of its diverse operations. Notably, revenue has climbed from $126 billion in fiscal 2019 to $212 billion in fiscal 2023, while earnings per share (EPS) have gone up from $5.06 to $9.68 during the same time.
Microsoft’s cloud computing platform, Azure, provides an extensive set of AI services. Azure’s scalable and flexible environment allows developers and businesses to seamlessly integrate AI solutions, ranging from machine learning to natural language processing. The widespread adoption of Azure by enterprises has solidified Microsoft’s standing in the AI market.
Furthermore, with a 22% market share, Microsoft’s Azure is ranked second in the cloud computing market, trailing only Amazon’s (AMZN) AWS (Amazon Web Services).
The success of cloud is driving Microsoft’s growth, as seen in its most recent first quarter of fiscal 2024. Intelligent Cloud segment revenue came in at $24.3 billion, an increase of 19% year-over-year, accounting for the majority of Microsoft’s total revenue of $56.5 billion, which grew 13% from the prior-year quarter. Operating income for the segment also surged 31% to $2.8 billion.
Notably, Azure revenue increased 29% year-on-year in the first quarter. CEO Satya Nadella highlighted that “more than 18,000 organizations now use Azure OpenAI Service.”
Microsoft has successfully incorporated AI capabilities into its existing product ecosystem, which includes Windows, Office 365, and Dynamics 365. All of its segments’ revenue grew in the first quarter. Management anticipates Productivity and Business Processes segment revenue to be in the 11% to 12% range in Q2.
While the slow recovery in the personal computing market has been a drag on sales, management expects the Activision Blizzard acquisition deal (closed in October) to drive the segment’s revenue in the $16.5 to $16.9 billion range for Q2. This would represent a growth of 16% to 19% in the Personal Computing segment over the year-ago quarter.
The Future of AI Growth
The company’s diverse revenue streams, which include cloud services and now AI-related products, help to strengthen its overall position in this competitive market.
Management believes Azure’s revenue will jump by 26% to 27% in constant currency terms, causing the Intelligent Segment revenue to fall in the $25.1 billion to $25.4 billion range in Q2.
For Q2 fiscal 2024, analysts expect Microsoft to report a 16% increase in revenue to $61.04 billion and a 19% increase in earnings to $2.76 per share. Furthermore, analysts predict revenue and earnings will increase by 14% and 15%, respectively, for the full fiscal year 2024.
Microsoft is set to release its Q2 earnings on Jan. 31, and we will learn more about Microsoft’s plan for fiscal 2024 then.
Microsoft trades at 34 times forward fiscal 2024 earnings, compared to its historical five-year average price-to-earnings ratio of 29. While it seems expensive, Microsoft’s long-term AI prospects might make it worth paying the premium.
Expert Views On MSFT
Recently, MarketWatch quoted Wedbush analyst Daniel Ives as saying, “The stock has yet to price in the next wave of cloud and AI expansion due to Microsoft’s strong competitive cloud edge.” Impressed with Microsoft’s AI products, Ives increased the target price on
Analyzing Microsoft’s Growth Prospects with Copilot Project
Amidst a backdrop of intense competition in the tech industry, Microsoft (MSFT) has recently received a “strong buy” rating with a projected target price of $450. This bullish sentiment is propelled by the Copilot project, which analysts claim could bring in a staggering $25 billion in revenue for Microsoft by fiscal year 2025.
Q1 Earnings Call Insights
During the Q1 earnings call, Microsoft’s CEO highlighted the remarkable progress of Copilot, with 1 million paid users and over 37,000 organizations subscribing to Copilot for Business. These figures signify robust adoption and underline the potential revenue stream it could unleash for the company in the near future.
Assessment of Competitive Landscape
Despite facing formidable competition in areas such as cloud services, machine learning, and natural language processing, there is confidence in Microsoft’s ability to maintain a competitive advantage. Analysts are optimistic about Microsoft’s positioning in comparison to other tech giants like Amazon and Alphabet (GOOGL), particularly in the realm of cloud computing.
Indeed, Microsoft’s potential to outperform its prominent rivals in cloud computing is gaining recognition, with the sentiment also prevailing among informed market-watchers.
Wall Street’s Bullish Stance on MSFT
Wall Street’s confidence in Microsoft is evident from the “strong buy” rating conferred upon the stock. Out of the 37 analysts covering the stock, 31 have recommended a “strong buy” while the remaining voices are divided between “moderate buy” and “hold” ratings. The average target price for MSFT is positioned at $408.34, with an ambitious high target price of $600 indicating significant upside potential in the eyes of investors.
The Bottom Line
Microsoft’s foray into the AI space, particularly through the Copilot project, underscores its promising trajectory. However, the competitive landscape remains fierce, with rivals equally committed to innovation and market expansion.
While the journey to dominance may be fraught with challenges, Microsoft’s well-established AI platform, strategic acquisitions, integrated solutions, and robust legacy products position it advantageously in the market. It is this resolve that fuels the optimism surrounding Microsoft, with many anticipating the company’s ascent to its projected high target price of $600, making it a compelling AI stock pick for 2024.
