Microsoft (MSFT 0.37%) is the world's second-largest company with a market capitalization of $2.1 trillion. It's trailing archrival Apple, which is currently valued at $2.5 trillion, but I'm going to explain why Microsoft has a growth advantage and could hit the $5 trillion mark first.
The company was founded in 1975, but over the years, it has evolved from a consumer software company into a tech powerhouse at the forefront of gaming, cloud computing, and now, artificial intelligence (AI).
Here's how Microsoft could amass $5 trillion in value by the end of this decade and deliver a 140% return for investors in the process.
Microsoft targets industries with high growth potential
If Microsoft relied solely on some of its flagship products like the Windows operating system and the Office 365 document suite, it would probably be struggling to generate growth right now. Those platforms are used by billions of people worldwide, so new customer acquisitions don't always move the needle.
Apple faces a similar challenge -- its iPhone smartphone is responsible for most of its revenue, but it inches closer to market saturation each year and mostly relies on the upgrade cycle. Microsoft has instead chosen to aggressively expand beyond its core areas of expertise. It has built its own hardware businesses, including its Surface line of notebook computers and tablets, and its Xbox gaming console.
Plus, its Azure cloud services platform ranks in the top two globally, providing hundreds of solutions to business customers embarking on digital transformations. Azure is regularly the fastest-growing piece of Microsoft's entire business, and by 2030 it will be operating in a market that could be worth $1.5 trillion per year, according to an estimate by Grand View Research.
Then there's Bing, the company's search engine that has failed to dent rival Alphabet's Google Search in any meaningful capacity. But that could soon change thanks to Microsoft's multibillion-dollar investment in OpenAI, the developer of the revolutionary ChatGPT chatbot powered by artificial intelligence.
It has the ability to offer detailed, tailored responses to difficult questions to give users the information they need faster than the traditional internet search model. Plus, Microsoft has integrated OpenAI into its Azure platform, giving customers access to game-changing AI tools with the power to transform their businesses.
Microsoft's greatest opportunities are still ahead
According to a forecast by Ark Investment Management, which is led by famous tech investor Cathie Wood, generative AI software like ChatGPT could attract $14 trillion in revenue by the end of this decade. Bing is one area where Microsoft will benefit, and the platform has already seen significant uptake. The Bing mobile app attracted as many downloads in a few weeks after the ChatGPT integration as it did in the whole of 2022.
Microsoft estimates the global digital advertising market is worth $500 billion, with 40% of that amount, or $200 billion, coming from search. Right now, the Bing search engine has a global market share of just 3%, but ChatGPT might be the catalyst it needs to finally eat into Google's dominant 93% share.
Microsoft's estimates suggest each percentage point of market share it gains in the search industry will be worth $2 billion in revenue per year. Could Bing achieve a market share of say 25% by 2030? Given its recent spike in adoption, it's certainly possible.
The company currently bundles its search and news advertising revenue together, and the segment generated $11.6 billion during fiscal 2022. With a 25% market share, Bing could contribute $50 billion per year to Microsoft's revenue -- at least $38.4 billion more than it does now.
Image source: Getty Images.
Here's how Microsoft could reach a $5 trillion valuation
From a valuation perspective, I'm going to focus on Microsoft's price to sales (P/S) ratio because it has held a consistent range between 8 and 12 for the past three years, despite the pandemic and the tech market crash. It's measured by taking the company's annual revenue of $198.3 billion in fiscal 2022 and dividing it by its market capitalization of $2.1 trillion. Therefore, Microsoft's current P/S ratio is 10.5.
The company has grown its annual revenue at a compound annual rate of 11.3% over the past seven years. If that growth rate remains consistent for the next seven years, Microsoft's revenue would top $420 billion in fiscal 2030. Based on a P/S ratio of 10.5, that would give the company a $4.41 trillion valuation.
But artificial intelligence could be Microsoft's ace in the hole. Considering the new ChatGPT-powered Bing could add a further $38.4 billion per year to Microsoft's revenue based on the market share scenario I highlighted earlier, that would increase its valuation by a further $403 billion, based on a P/S ratio of 10.5. That gets Microsoft to a $4.81 trillion market capitalization.
Although that's a mere fraction of Ark's $14 trillion revenue estimate for the AI industry as a whole. Add in the potential of OpenAI's integrations with Azure, and business customers could be turning to Microsoft en masse to supercharge their operations with the most advanced AI tools available. Ultimately, that could be enough to lift Microsoft's valuation above the $5 trillion mark.
