Microsoft has entered a new phase of growth, fueled by aggressive AI investments.
One of the biggest barometers of the artificial intelligence (AI) revolution is: microsoft (MSFT -0.18%). Windows developers started becoming AI maniacs after making a significant investment in OpenAI in January 2023.
OpenAI is the maker of ChatGPT, a popular large-scale language model (LLM) that can write essays, generate software code, and even generate images based on text prompts.
Over the past year and a half, Microsoft has integrated ChatGPT’s capabilities across its ecosystem, from workplace productivity tools to social media platforms to cloud computing.
Microsoft recently reported its fiscal third quarter 2024 earnings (ending March 31). There was a lot of optimism sprinkled throughout the earnings report, with advances in AI taking center stage.
Let’s take a look at Microsoft’s performance and find out why this member of the Magnificent Seven is the best stock to own forever.
Microsoft’s business is firing on all cylinders
Microsoft is an absolute giant. In addition to its main growth engine in Azure cloud computing services, the company also operates in gaming, social media, and personal computing.
For the three months ended March 31, Microsoft’s revenue rose 17% year over year to $61.9 billion. As always, all eyes were on Azure, and it did not disappoint. Revenue from Microsoft Cloud reached his $35.1 billion, up 23% year over year. In the cloud segment, server products and cloud services were the main sources of growth.
MSFT Earnings (Quarterly) Data by YCharts
What makes Microsoft such an attractive company is that both its revenue and profits are skyrocketing. By growing profits, Microsoft has greater financial flexibility. At the end of the quarter, the company had $80 billion in cash and equivalents on its balance sheet.
Microsoft is aggressively reinvesting excess profits, and its latest generative AI applications are already showing some promising signs.
Image source: Getty Images.
Co-pilot is a hidden gem
“Microsoft Copilot and the Copilot stack…are orchestrating a new era of AI transformation,” Microsoft CEO Satya Nadella proudly told investors during an earnings call.
Microsoft Copilot is a smart assistant that is increasingly integrated across the Microsoft ecosystem. The underlying idea is that AI-powered features are increasingly available in almost every service Microsoft offers. This is driving a new wave of productivity across a variety of use cases and market sectors for Microsoft users.
In fact, Microsoft had 30,000 Copilot users as of March 31st. This is a 175% increase over the previous quarter. Microsoft Copilot powers approximately 60% of Fortune 500 companies and boasts customers including: Nvidia, novo nordiskand amgen.
Premium rating for the price
Microsoft currently trades at a price-to-earnings ratio (P/E) of 35.6. This is higher than many of its mega-cap tech peers. S&P500has a forward P/E ratio of 20.7.
MSFT Total Return Price Data by YCharts
This chart should make it clear why Microsoft stock is trading at a premium. This analysis shows Microsoft’s long-term total return versus both megacap AI stocks and other giant technology companies that were once considered some of the most innovative technology businesses.
Microsoft is the best performing stock in this peer group. Moreover, given the momentum the company is seeing thanks to its AI ambitions, we think further gains are on the horizon.
I think buying Microsoft stock now will be a good long-term decision. The company has a track record of generous shareholder returns, significantly outperforming its competitors.
In some ways, Microsoft reflects the characteristics of a blue-chip company, given its steady revenue growth and solid cash flow. But at the same time, the company is still in growth mode.
Reliable revenue and profit growth, coupled with a new wave of AI-powered growth, is a very rare combination. In my opinion, Microsoft has a premium valuation and is a stock that investors can hold forever.
Suzanne Frey, an Alphabet executive, is a member of the Motley Fool’s board of directors. John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Adam Spatacco has held positions at Alphabet, Amazon, Apple, Microsoft, Novo Nordisk, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Cisco Systems, Microsoft, Nvidia, and Oracle. The Motley Fool recommends Amgen, International Business Machines, and Novo Nordisk and recommends the following options: A long January 2026 $395 call on Microsoft and a short January 2026 $405 call on Microsoft. The Motley Fool has a disclosure policy.
