Uncertainty is the greatest risk facing investors in any new industry. Take artificial intelligence (AI), for example. Even if artificial intelligence is the most significant leap forward since the internet, identifying the best investments with which to capitalize on AI is an educated guess today. Like many industries, AI will create powerful businesses that produce life-changing returns for those fortunate enough to find them.
Technology conglomerate Microsoft (MSFT -1.84%), already a powerhouse with a $2.3 trillion market cap, isn't exactly a diamond in the rough. However, its direct exposure to AI's potential growth makes it a compelling stock to hold through the potential AI revolution. Here is why Microsoft could be the best AI stock you can buy today.
Microsoft isn't an "AI or nothing" play
Most people will probably agree that AI could have a big impact on the world, but how many feel confident they know what will be the most influential AI companies five or 10 years from now? Sure, the market reveals early crowd favorites, like C3.ai, which is up more than 100% since January. But a lot can change in a short time, especially in such a young and fast-moving field.
Building a company on AI alone is risky because there's no established market leader, and the business could sink if its AI plans don't work as hoped. But Microsoft doesn't have that worry. It has already built a multitrillion-dollar empire -- comprising various enterprise software products, a cloud platform, and more -- without AI, so it isn't counting on that sector for its future. The company generated $57 billion in cash flow over the past year.
So for Microsoft, AI is the icing on the cake, not the cake itself. The company is using AI to enhance existing products. Can AI help those products grow or distance themselves from the competition? If so, great! But Microsoft is already a blue chip technology stock worth owning for many reasons beyond anything to do with AI. That makes it safer than arguably any other AI companies you'll come across.
The picks-and-shovels angle
Microsoft has invested billions in and partnered with ChatGPT creator OpenAI, giving the company funding in exchange for certain perks. The incentive works both ways, because Microsoft has exclusive cloud rights with Azure, which will power all of OpenAI's research, products, and APIs.
While companies like Alphabet will compete with OpenAI and Microsoft, ChatGPT's historic growth makes it an early favorite for potential product integration, which should indirectly funnel business to Microsoft. It almost makes Microsoft a picks-and-shovels investment in AI, benefiting from the field's broader growth versus a specific application.
It's like the electric vehicle industry. EVs might be the future, and time will tell which EV companies sell the most vehicles. But the electric utilities selling the power to charge the EV batteries don't care about all that, only that people use EVs.
Fundamentals you can hang your hat on today
While high-growth companies tell investors how they hope the business will be profitable within several years, Microsoft is printing cash profits today. The company does more than $207 billion in annual revenue, and 27% of that winds up as free cash flow. Microsoft has $104 billion in cash on its books, likely enough to scoop up or invest in a promising AI company should one emerge, like with OpenAI.
MSFT Free Cash Flow data by YCharts.
An AI stock doesn't have to cost an arm and a leg. Shares of Microsoft are trading at a forward price-to-earnings ratio (P/E) of 32, a touch higher than its long-term averages. Still, it's a valuation that Microsoft could grow into over time, with or without AI adding to its existing business.
Microsoft probably isn't anywhere near the best AI stock for potential upside. But potential is only worth anything if it's realized. Microsoft has a lower ceiling due to its size, but its excellent existing qualities make it arguably the safest AI stock you can buy today. And in such a new and volatile field, that carries a bit of weight.
