Microsoft (MSFT 1.82%) has come a long way since it was founded in 1975. It remains at the pinnacle of the technology industry 48 years later, with a current valuation of $2.5 trillion, making it the second-largest company in the world behind Apple.
Microsoft's consistent success stems from a relentless focus on innovation; it has branched out from its origins as a software company to dominate new industries like cloud computing, gaming, and now artificial intelligence (AI).
On Monday, a court filing revealed that Microsoft CEO Satya Nadella has one particularly ambitious goal for the company's future, and if he achieves it, Microsoft stock will likely double between now and 2030. Here's what you need to know.
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Microsoft is building for a future powered by AI
Billions around the globe use Microsoft's Windows operating system and its 365 document suite, which includes programs like Word and Excel. But those timeless brands are no longer the company's core drivers of growth. Instead, its cloud computing platform, Azure, is the engine powering it forward, and artificial intelligence is about to supercharge its potential.
This year, Microsoft acquired an estimated $10 billion stake in OpenAI, developer of the ChatGPT platform. Azure is already offering OpenAI's latest GPT-4 chatbot to business customers, helping them boost productivity and better serve their customers.
Plus, Microsoft also acquired a stake in Builder.ai recently, which uses AI to develop software applications for entrepreneurs who don't have any technical programming experience. Integrations with Azure and even OpenAI have already been earmarked, which could draw businesses of all sizes to the cloud platform.
OpenAI's integration with Microsoft's Bing search engine is also making waves in the tech world as it attempts to disrupt the dominant market share held by Alphabet's Google Search. Prompting a chatbot for answers to questions has already proven more convenient than sifting through a list of web pages in traditional search results, and Microsoft is convinced this is the future. The market for digital ads in search engines is worth $200 billion per year right now, which is a big opportunity for Bing if it can shake up the industry.
Some financial estimates for the future value of AI-powered software are staggering. Cathie Wood's Ark Investment Management thinks tools like ChatGPT could add $200 trillion to global economic output by the end of this decade, creating $90 trillion in enterprise value for companies like OpenAI and Microsoft.
Nadella has set a bold target for the future
Meanwhile, Microsoft is currently battling the U.S. Federal Trade Commission (FTC) in court. The FTC is attempting to block the company's acquisition of game development studio Activision Blizzard (ATVI), because the deal could give Microsoft (and its Xbox platform) too much power in the gaming market.
Activision is responsible for some of the industry's most successful titles, including World of Warcraft, Call of Duty, and Diablo. The FTC is concerned Microsoft's acquisition of the company could result in games being developed exclusively for Xbox, unfairly locking out competitors like Sony and its PlayStation platform. The deal will be worth about $68 billion if it goes through, but it might not be the difference maker for Microsoft's long-term growth, given its other prospects in areas like AI.
A series of comments from Satya Nadella to his executive team from June 2022 were uncovered in a filing related to the case, and they revealed one very ambitious goal of his: to have Microsoft generate $500 billion in annual revenue by fiscal 2030.
Can Microsoft realistically achieve Nadella's goal?
Over the last four quarters, Microsoft has generated $207.5 billion in total revenue, and since the company is valued at $2.5 trillion right now, its stock trades at a price to sales (P/S) ratio of 12. Keep that figure in mind for a moment.
Microsoft will have to more than double its annual revenue between now and fiscal 2030 to top the $500 billion mark; in other words, it will have to generate a compound annual growth rate (CAGR) of 13.3% over the next seven years. Looking to the past, the company only grew its revenue at a CAGR of 11.3% in the seven-year period between fiscal 2015 and fiscal 2022 -- a sign that it might fall short.
But looking at the three-year period between fiscal 2019 and 2022 instead, Microsoft's revenue has actually expanded at a CAGR of 16.3%. In my view, the company has several new growth drivers on the horizon thanks to artificial intelligence integrations with Bing and Azure, which could trigger an acceleration in its revenue growth.
Therefore, Microsoft's more recent results might be a better reflection of its future potential, and not to mention, Nadella's goal is to return the company to 20% annual revenue growth. That might be tough to sustain over the long term, but investors certainly can't question his focus or ambition.
If Satya Nadella does hit his mark by fiscal 2030, what could that mean for Microsoft's stock price? That's where its P/S ratio of 12 comes in, because if that figure remains constant, $500 billion in revenue would give Microsoft a valuation of $6 trillion. That means its stock will more than double from where it trades today.
Personally, I'm quite optimistic about the company's prospects -- in fact, a few months ago, I made my own prediction suggesting Microsoft could become the world's first $5 trillion company. Suffice it to say, I felt more optimistic than ever after Nadella's aspirations for the future were revealed this week.
