When you're a trillion-dollar company like Microsoft (MSFT 1.44%), there's a lot of pressure to find the next big thing. What's going to help the company continue growing? It's not an easy question to answer.
Microsoft got it right over a decade ago when it launched its Azure cloud platform in 2010. The company has grown revenue by 226% since then, and the stock has returned 1,170% in total returns.
Now, the company has laid down the cards for its next big bet: artificial intelligence. Where could AI take Microsoft over the next 10 years? The clues point to some exciting news. Here is what you need to know.
Microsoft's AI investment might end up looking cheap
Artificial intelligence research company OpenAI and Microsoft announced a multiyear partnership worth an estimated $10 billion in January. It's the third phase of a collaboration that began in 2019.
But it's easily manageable for the deep-pocketed Microsoft. After all, it has roughly $100 billion in cash on its balance sheet and generated roughly $60 billion in free cash flow over the past four quarters. In short, it's a significant investment today that should eventually look more like a blip.
But what is Microsoft getting for its cash? It turns out quite a bit, including rights to commercialize OpenAI's emerging AI technologies. You've seen some of that with ChatGPT integration into the Bing search engine and Office 365. Azure will also be the exclusive cloud platform to support the computing workload of OpenAI's research, products, and API services.
The partnership's crown jewel could be the growth OpenAI's exploding popularity brings to Azure. OpenAI reportedly saw 100 million users within two months of launching ChatGPT. It's early, but history could look back on this partnership as Microsoft's equivalent to Meta Platforms buying Instagram or Alphabet buying YouTube and turning them into core assets.
How big is the AI opportunity?
Putting numbers on Microsoft's AI opportunity is the tricky part. Only time will tell, but analysts believe that Microsoft will have a huge market opportunity to chase. According to a study by Grandview Research, the global AI market could grow by an average of 37% annually through 2030, becoming a $1.8 trillion market at the end of the decade.
There are some dynamics at work, though. AI requires a lot of computing power to analyze vast amounts of data. An analyst told Forbes that building AI into every Google search would cost more than $100 billion in computing investments to support it. Few companies will have the budget to build their infrastructure with AI, which could make platforms like Azure more practical.
From autonomous vehicles to chatbots, there are a lot of use cases where AI makes sense, and it appears that growth could be limited by computing power constraints more than demand for AI. Cloud computing platforms like Azure should benefit, as they support these computations behind the scenes.
What is Wall Street factoring into shares today?
You've probably seen some headlines recently: AI is one of Wall Street's hottest topics. AI excitement and investors' desire for reliable, profitable investments in this shaky market have supported the stock recently. Shares are up 18% since January and now trade above their average price-to-earnings ratio (P/E) over the past decade:
MSFT PE Ratio data by YCharts
It's still too early to proclaim that AI will add a specific amount to long-term earnings growth, so investors are probably wise to stay cautious for now. Stay patient and consider waiting for a pullback before buying shares.
The company's OpenAI deal has the making of a game changer -- the next catalyst for growth over the coming years. But this is a long-term opportunity, so no need to rush -- don't let FOMO (fear of missing out) make you chase the stock.
