Tech behemoth Microsoft (MSFT) has etched its name in the annals of the technology industry. Armed with a robust lineup of customer-favorite products, the company stands on a foundation of solid rock. Over the past decade, investors have reaped a staggering 895% return on Microsoft stock.
Showcasing a varied portfolio encompassing software, hardware, and cloud computing services, Microsoft has consistently displayed impressive revenue growth quarter after quarter. The recently released third-quarter fiscal 2024 earnings underscore the extraordinary growth narrative, with both revenue and earnings surpassing analysts’ expectations.
With a high target price of $600, suggesting a prospective 50% gain in the coming year, Microsoft’s foray into artificial intelligence (AI)-driven products seems poised for success.
Valued at $2.98 trillion, the stock has surged by 6.5% year-to-date, keeping stride with the tech-heavy Nasdaq Composite’s performance.
The Azure Cloud Propulsion
Beyond its conventional offerings, Microsoft’s Azure cloud computing platform has emerged as a pivotal asset for the company. The integration of AI into Azure has propelled cloud services to the forefront of Microsoft’s growth trajectory.
The third quarter of fiscal 2024 witnessed a substantial 23% year-on-year increase in Microsoft Cloud revenue, totaling $35.1 billion. Among its three business segments, the Intelligent Cloud sector experienced a remarkable 21% revenue surge to $26.7 billion. Operating income for the segment soared by 32% to $12.5 billion. The Productivity and Business Processes segment observed an 11.7% revenue upswing, while the More Personal Computing segment, previously grappling, marked a 17.4% revenue escalation in Q3.
The Intelligent Cloud segment alone contributed 43% to Microsoft’s total revenue of $61.8 billion, recording a 17% uptick from the corresponding quarter of the previous year. Adjusted earnings per share made a 20% leap to $2.94.
With AI integration in all flagship products and the launch of new AI-driven offerings, Microsoft continues to showcase its commitment to innovation. During the Q1 earnings call, CEO Satya Nadella proudly announced, “Bing reached over 140 million daily active users.”
Anticipated Q4 Prospects
Projections for the fourth quarter foresee a 9% to 11% revenue growth in the Productivity and Business Processes segment, escalating from $19.9 billion to $20.2 billion. Moreover, the Intelligent Cloud segment is expected to witness a revenue surge of 19% to 20% to reach $28.4 billion to $28.7 billion, courtesy of the projected 30% to 31% growth in Azure AI. Similarly, the More Personal Computing segment is expected to achieve a revenue boost ranging from 10% to 13%.
From a financial standpoint, Microsoft flaunts $80 billion in cash, cash equivalents, and short-term investments alongside $42.6 billion in long-term debt. Reporting $21 billion in free cash flow, Microsoft judiciously utilized this substantial FCF to allocate $8.4 billion towards share repurchases and dividends.
Analysts are optimistic about the company’s growth prospects, predicting a 15.5% revenue growth and a 20.4% earnings upsurge for the fiscal year 2024.
Although Microsoft currently trades at 34 times forward fiscal 2024 earnings and 12 times forward sales, its dominant market position and promising AI-driven growth trajectory could justify the premium valuation.
Assessment by Wall Street
In the wake of Microsoft’s stellar Q3 performance, Bank of America Securities analyst Bradley Sills reaffirmed his “buy” rating and a $480 price target. Impressed by the prowess of the cloud sector, Sills envisions long-term growth potential driven by AI. He asserts, “The overall strength in Azure is deemed sufficient to propel Microsoft’s total revenue growth, and the investment in cloud infrastructure is viewed as justified by the significant opportunities in AI.”
RBC Capital also maintained its “buy” rating and set a price target of $450.
Wall Street sentiment leans heavily towards a “strong buy” rating for Microsoft stock. Of the 37 analysts covering MSFT, 33 advocate a “strong buy,” three suggest a “moderate buy,” and one recommends a “hold.” The average target price for MSFT stock stands at $460, reflecting a 14.8% upside potential from current levels. Furthermore, the Street-high estimate of $600 implies a substantial 49.7% upside in the next 12 months.
The Timeliness of Embracing this AI Stock
While other tech giants like Amazon and Alphabet (GOOGL) also shine as commendable AI investments, Microsoft’s lead in AI, coupled with its legacy portfolio, visionary leadership, industry expertise, top-notch AI offerings, and strategic alliances, position it as a top pick for investors. There is no doubt that Microsoft stands out as one of the prime AI stocks to acquire now and hold indefinitely.
