Microsoft's (MSFT -0.18%) shareholders have enjoyed a steep rally in its stock price in recent months. Following a strong fiscal 2023 third-quarter performance, the software leader's shares are up a solid 28% so far this year.
Better still, Microsoft appears to be poised to break out to new all-time highs. Here's why.
1. A massive growth opportunity in the cloud awaits
Recession fears drove many companies to slow their investments in technology. Microsoft worked with its customers to optimize their tech spending, which weighed on the company's revenue in recent quarters. But it's the correct long-term move, as it should help to build goodwill among its client base.
We're likely nearing the end of these spending cuts. During Microsoft's fiscal 2023 third-quarter earnings call on April 25, chief financial officer Amy Hood said, "At some point, workloads just can't be optimized much further." Beyond this point, Microsoft's cloud growth is likely to reaccelerate.
Make no mistake: Despite these considerable macroeconomic challenges, Microsoft's cloud operations are already expanding at an impressive clip. Its Azure and other cloud services revenue jumped 27% in its fiscal third quarter, and 31% when adjusting for foreign currency fluctuations.
Moreover, despite years of torrid growth, Microsoft's expansion in the cloud remains in its early innings. Amazon CEO Andy Jassy noted in his recent letter to shareholders that "about 90% of global IT spending [is] still on-premises and yet to migrate to the cloud." With its Azure cloud computing platform growing even faster than Amazon Web Services, Microsoft stands to benefit from this trend as much as its rival -- and perhaps even more so.
2. AI could be a powerful profit driver
Artificial intelligence (AI) should further fuel Microsoft's expansion. Following its multibillion-dollar investment in OpenAI in January, Microsoft moved quickly to integrate the ChatGPT maker's cutting-edge technology across its products and services.
Microsoft's Word and Excel productivity software, Teams communication platform, and GitHub code-writing tools all received new AI-powered features intended to make these products even more valuable for users. This increased functionality should allow Microsoft to eventually charge higher prices for its software. That, in turn, could drive the tech titan's already enviable profit margins even higher -- and its stock price along with them.
MSFT Operating Margin (TTM) data by YCharts
Microsoft has a particularly keen interest in increasing its share of a global internet search advertising revenue market that's projected to top $400 billion by 2026, according to Statista.
CEO Satya Nadella intends to use AI to wrestle away users from the current search king, Alphabet's Google. To do so, Microsoft is deploying a new version of its Bing search engine that uses AI to deliver more relevant and complete answers in a convenient, conversational way.
Due in part to Microsoft's newfound AI capabilities, electronics giant Samsung is reportedly thinking about switching the default search engine on its popular devices from Google to Bing. Analysts at Bank of America believe Apple might also be considering a switch to Bing. If Microsoft can successfully convert these tech leaders, it could win a deluge of search-based profits.
