Microsoft (NASDAQ:MSFT) clearly capitalized on the generative AI growth trend during 2023. However, make no mistake, this was anything but a “one and done” event that boosted MSFT stock. Based on the latest headlines, the “Magnificent Seven” component remains poised to level up on last year’s success. This points to Microsoft continuing to deliver top and bottom-line growth that exceeds expectations.
Sure, MSFT isn’t exactly cheap, at 35 times forward earnings. Look at a recent stock chart. It may also look like shares are on the verge of topping out. Any bearish conclusions you’re coming to based on valuation or near-term performance may be simply a case of making a mountain out of a molehill. As I’ll explain below, here’s why the bull case still stands strong.
MSFT Stock 2024: Another Banner Year in the Making
Competitors like Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) may play catch-up, but after its AI-related efforts in 2023, Microsoft is well-positioned to really “cash the check” regarding generative AI during 2024. Over the past year, the tech giant has taken the technology gained through its massive investment in ChatGPT developer OpenAI, and ran with it.
Microsoft has integrated ChatGPT-like functions into its Bing search engine. The company has also integrated this technology into both its Office365 suite of products and into its Azure cloud computing segment. To top things off, the software giant last year launched a new AI application, Microsoft 365 Copilot.
Some may believe that the impact of this AI integration is already baked into the MSFT stock price. However, a look at Microsoft’s most-recently released quarterly results signals why this isn’t the case. Namely, because the company’s strong results last quarter (year-over-year growth of 30%) were only partially attributable to its AI commercialization efforts.
The impact of Microsoft’s acquisition of Activision, plus a general rebound in PC and cloud computing demand, were the main drivers. In the quarters ahead, though, AI-related growth will really start to be the main booster for overall results.
AI’s Direct, Indirect, and Future Impact on Microsoft’s Growth
This year and beyond, the generative AI growth trend is likely to have a massive impact on Microsoft’s growth, and on the price performance of MSFT stock. First, the sale of AI software products like Copilot will have a direct positive impact on results.
Last November, analysts at Piper Sandler estimated this product could be generating $10 billion in annual sales for the company by 2026. However, it’s not out of the question for Copilot annual sales to hit the $10 billion mark far sooner. Priced at $30 per user per month, $10 billion represents around 27.8 million “paid seats” (user licenses).
There are now over 400 million “paid seats” for Office 365. Hence, all Microsoft needs to do is convince 7% of these users to purchase the add-on product. Besides direct impact, AI products/features could have an indirect impact on fiscal results.
There could be a cross-selling opportunity. For instance, those licensing copilot could purchase Azure cloud services in lieu of cloud services from another provider (such as Google). As for the future (and as I’ve noted in previous coverage) Microsoft has big plans to keep leveling up on its AI success.
The Verdict
Long-term sell-side forecasts call for Microsoft to report annual earnings growth in the mid-teens range between now and the fiscal year ending June 2026.
To many, MSFT may still seem pricey. At least, when compared to GOOG, which analyst forecasts also say will achieve similarly-sized levels of future growth, yet trades at a forward multiple in the low-20s.
However, there are two good reasons why MSFT trades at a premium to Alphabet. First, in light of its own AI setbacks, there are still doubts that the Google parent can achieve such levels of growth.
Second, thanks to factors like the ones listed above, Microsoft could not just meet, but handily beat, growth expectations.
In short, we remain confident MSFT stock is the top choice for investors seeking exposure to the “rise of AI” growth trend.
MSFT stock earns an A rating in Portfolio Grader.
— Louis Navellier and the Investor Place Research Staff
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Source: Investor Place