Numero Uno stock Microsoft (NASDAQ:MSFT), with a $3 trillion market cap, has delivered a return of around 1,154% over the last decade. Sitting at the top of the global stock markets, will it continue to give similar returns in the next decade? I believe the answer is yes. Microsoft’s consistently strong performance, cloud & AI-driven tailwinds, and robust margins despite substantial AI investments make me bullish on the stock. Thus, I’ll take advantage of any market weakness in the coming months to purchase MSFT.
Microsoft’s Recent Results Were Strong Yet Again
On April 25, Microsoft reported impressive Fiscal Q3 results for the seventh consecutive quarter, driven by upbeat performance across all business segments. Q3 adjusted earnings of $2.94 per share handily beat analysts’ estimates of $2.82 per share. Also, earnings jumped 20% year-over-year compared to earnings of $2.45 per share in the prior-year period.
Further, revenues soared 17% year-over-year to $61.9 billion. The Intelligent Cloud business segment, encompassing Azure Cloud, SQL Server, and Windows, among others, grew 23% year-over-year to $26.7 billion, beating expectations yet again. The much-watched segment now comprises 35% of total revenues, with AI playing a significant role as a catalyst driving growth.
With the increasing adoption of AI by businesses, there is a substantial demand for Microsoft’s Azure and related cloud services. Not surprisingly, Azure and other cloud services witnessed solid revenue growth of 31% (28% in constant currency), significantly surpassing Wall Street’s expectations.
Despite the strong Q3 performance, Microsoft provided a conservative outlook, slightly below expectations. Fiscal Q4 revenues are projected to be $64 billion compared to consensus expectations of $64.5 billion, with Azure revenues expected to grow between 30% and 31%.
On a positive note, Microsoft offered its FY2025 outlook, anticipating double-digit growth in both revenues and operating income. This forecast reassures investors of the company’s sustained growth trajectory.
AI Will Continue to Act as a Long-Term Catalyst for MSFT
AI has propelled Microsoft to become the largest stock in the world, and it will continue to be the driving force behind its growth story in the coming decade. Microsoft’s early investment in OpenAI’s ChatGPT has positioned it ahead of other tech giants.
The demand for AI remains insatiable, with Microsoft management stating that it exceeds available capacity. This high demand drives continuous heavy investment in AI by Microsoft and other tech titans.
Microsoft’s AI investment plans align with those of its major competitors, who are also making substantial investments in the space. For instance, Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) reported CAPEX (capital expenditures) of $12 billion in the recently ended first quarter, and Meta Platforms (NASDAQ:META) spent $6.72 billion. Microsoft, Google, and Meta Platforms plan to escalate their CAPEX spending in AI in the upcoming quarters.
In the recent quarter, Microsoft reported a 22% sequential jump in CAPEX (including finance leases) to $14 billion versus $11.5 billion in the prior quarter. The majority of that amount is assigned to scaling its AI infrastructure and securing processors from Nvidia (NASDAQ:NVDA) for running large AI models.
Increasing CAPEX may impact margins. However, Microsoft’s management is taking the initiative to keep costs low and protect margins. For instance, newer and more efficient AI products like GPT-4o and Mai-1 are expected to increase scale and keep costs under control. Furthermore, Mai-1 will compete with major rivals, namely Google’s Gemini and OpenAI’s ChatGPT.
Azure AI Services, which includes AI training and other AI-related services, is experiencing remarkable growth. Azure competes directly with Amazon’s (NASDAQ:AMZN) AWS and Google’s cloud business and is closely watched by investors. Notably, Azure AI Services is now estimated to be an over $4 billion run rate business. For comparison (although not a direct comparison), Amazon’s AWS has reached a $100 billion annual run rate. This underscores the substantial opportunity for Azure powered by AI in the coming years.
During the earnings call, management confirmed that Azure continues to gain market share, with 65% of Fortune 500 companies using Azure Open AI. There’s a clear acceleration in Azure’s growth, marked by the signing of large deals across several diverse industries, with names like Coca-Cola (NYSE:KO) being added to its clientele. Azure will likely continue to see the growth momentum with increased market share gains in the coming months.
Further, Microsoft 365 Copilot (AI-backed online assistant) is showing steady adoption. Management stated that 60% of Fortune 500 companies now use the Copilot AI program. The company remains optimistic about its growing contribution to revenues in the coming years.
It’s not just Azure and Copilot. Microsoft’s AI investments and capabilities are expected to boost revenues and profitability across other product portfolios, such as GitHub, Fabric, and Security.
On a separate note, MSFT’s acquisition of gaming software rival Activision Blizzard (NASDAQ:ATVI) will continue to add to MSFT’s diversified revenue stream. Microsoft recently announced the unveiling of its own mobile store game, equivalent to Apple’s (NASDAQ:AAPL) App Store and Google’s Play Store.
Microsoft’s Valuation Isn’t Cheap but Isn’t Expensive Either
Despite being the most valuable stock in the world, Microsoft’s valuation isn’t as expensive as one would think. At first glance, It may look expensive, trading at a forward P/E of 37x currently. Nonetheless, I believe the premium is justified, given its favorable industry-leading market position, robust margins, diversified revenue stream, and huge exposure to high-growth AI and cloud businesses.
For the sake of comparison, online retail and cloud computing giant Amazon is trading at a P/E of 51x, while social networking company Meta Platforms is trading at a 27x P/E.
Is MSFT Stock a Buy, According to Analysts?
Wall Street analysts continue to be bullish on Microsoft stock, with a majority of them raising their price targets after the earnings report. Overall, the stock commands a Strong Buy consensus rating based on 32 Buys and one Hold assigned in the past month. Microsoft stock’s average price target of $491.56 implies 14.2% upside potential from current levels.
Conclusion: Consider Buying MSFT for Its Long-Term Growth
The AI revolution has taken the world by storm, and Microsoft continues to lead the charge. Microsoft’s early investments in AI have positioned it as a frontrunner in the industry, yielding significant rewards. I believe that Microsoft’s GenAI innovations will continue to drive revenues, profits, and cash flows in the coming years.
With a long runway for growth and profitability ahead, Microsoft remains a compelling investment. I plan to keep adding MSFT to my portfolio, taking advantage of any market weaknesses in the coming months.
