Microsoft’s next chapter will revolve around AI.
The technology sector has been one of the best-performing industries so far in 2024 thanks in large part to booming demand in artificial intelligence (AI).
Unsurprisingly, it seems like every tech company is trying to brand itself as an AI opportunity right now. However, one company that is emerging as a legitimate frontrunner in the AI marathon is Microsoft (MSFT 1.64%).
Let’s dig into how Microsoft is making a splash in the AI realm, and explore why now is a great time for long-term investors to scoop up shares.
How is Microsoft disrupting AI?
In November 2022, the technology industry witnessed a seismic shift as the world was introduced to ChatGPT. It did not take long for ChatGPT to become large-scale. By January 2023, media reports were circulating that ChatGPT had over 100 million users on the platform.
Considering its widespread popularity and the sophistication of its large language model technology, it’s no coincidence that Microsoft invested $10 billion into ChatGPT’s parent company, OpenAI, in January 2023.
Over the last year and a half, Microsoft has integrated ChatGPT across its entire ecosystem. While it’s still in the early days, the initial financial results since its investment in ChatGPT have been quite impressive.
Image source: Getty Images.
Are the investments paying off?
One of the biggest growth opportunities for AI in general is cloud computing. According to Statista, Microsoft currently owns 25% of the global cloud infrastructure market — second only to Amazon. Back in April, Microsoft reported financial results for its third quarter of fiscal 2024. For the period ended March 31, Microsoft generated $26.7 billion in its Intelligent Cloud unit — an increase of 21% year over year.
Within the Intelligent Cloud segment, revenue from Microsoft’s Azure cloud services grew by 31% year over year. Considering the level of competition among cloud infrastructure providers, I’m encouraged by Azure’s growth rate. Moreover, after listening to management’s commentary during the call, investors have reason to believe that much more growth could be on the horizon.
One of the biggest new products Microsoft has released since integrating ChatGPT into the business is a virtual assistant called CoPilot. According to management, roughly 60% of the Fortune 500 use CoPilot.
A premium valuation well worth the price
The chart below shows that Microsoft’s current price-to-earnings (P/E) ratio and price-to-free-cash-flow (P/FCF) levels are well above their 10-year averages.
MSFT PE Ratio data by YCharts
Although these valuation levels might suggest Microsoft stock is a bit pricey, I’d encourage investors to zoom out and think about the bigger picture.
In less than two years, Microsoft has swiftly implemented a brand new AI application across its ecosystem. In doing so, the company has continued to further accelerate its cloud business while heavily penetrating the world’s largest businesses with its new CoPilot assistant.
Investors who are looking for exposure to AI should consider a position in Microsoft. The company’s ecosystem spans many different end markets, including cloud infrastructure, personal computing, workplace productivity, gaming, social networking, and more. All of these areas have the potential to be completely revolutionized by AI.
To me, AI represents an interesting new chapter in Microsoft’s evolution.
The secular tailwinds fueling the broader AI landscape suggest that the technology is here to stay one way or another. Considering Microsoft has been a dominant force across many areas of the technology spectrum for nearly 50 years, I’m convinced that its investments in ChatGPT will ensure it will be well positioned in the AI realm for years to come.
I think Microsoft is a rare breed in that investors can own the stock forever and benefit from the company’s steadfast commitment to innovation and growth. For these reasons, I think investors are best off investing in Microsoft over a long term time horizon and holding onto the stock.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Amazon and Microsoft. The Motley Fool has positions in and recommends Amazon and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.