The tech sector has pleasantly surprised many investors this year, including shareholders of Microsoft (MSFT +0.05%). Artificial intelligence (AI) hype, the potential for a slowdown in Federal Reserve interest rate hikes, and overall optimism surrounding the market's 2023 outlook have benefited Microsoft, up over 38% so far this year.
Despite its 2023 rally so far, Microsoft is still a great buying opportunity for long-term investors right now -- especially if it reaches its 2030 projections.
NASDAQ: MSFT
Key Data Points
Aggressive revenue goals from the CEO
In its fiscal third quarter, ended March 31, Microsoft brought in $52.9 billion in revenue. That was up 7% year over year and puts the company on pace to outperform the $198.3 billion in revenue it made in its fiscal 2022. Still, that's only scratching the surface of the potential.
It was recently revealed that Microsoft CEO Satya Nadella set aggressive revenue targets for the company. Nadella said Microsoft plans to reach $500 billion in revenue by 2030, which would essentially double its current revenue.
Projections don't guarantee it'll happen, but assuming the company is able to reach that level, it'll put Microsoft in a league of only a handful of companies. Confidence on this level from Nadella should reassure investors that the company has an aggressive growth plan.
This revenue growth should also work wonders for Microsoft's bottom line, considering its high gross profit margin. A good portion of Microsoft's revenue comes from its services and software, so its margin is higher than many other big tech companies that rely on hardware sales. Once most software is created, you can ship as much as you like without incurring too much extra cost outside of maintenance and updates.
Data by YCharts
An abundance of revenue streams
There's no doubt Microsoft is a cash cow, but it helps that the company has such diverse revenue streams. Many big tech companies have multiple revenue streams, but a lot of them still rely on a particular segment to do the heavy lifting.
Of the $52.9 billion Microsoft made in Q3, its most lucrative segment only accounted for around 41%. And that's a broad segment that includes all its server products and cloud services. For perspective, in its latest quarter, just the iPhone accounted for over 54% of Apple's revenue.
The diversity in revenue streams helps ensure Microsoft isn't affected too drastically if a particular segment underperforms for any particular reason.
A strategic AI partnership
To date, Microsoft has invested around $13 billion into ChatGPT's creator, OpenAI, and if AI hype materializes anywhere close to the hype, it'll likely be one of the best returns on investment that the company has experienced. It benefits Microsoft in two major ways.
To begin, Microsoft and its cloud platform Azure provide the supercomputing systems and power needed to accelerate and power OpenAI. As companies hurry to integrate OpenAI software into their own products, Azure should see a spike in workloads on its server. The better Azure's AI infrastructure, the larger it can scale as the overall industry grows.
The partnership also gives Microsoft a direct path to more conveniently integrate OpenAI models and technology into its own products and services. Assuming AI increases productivity like many predict it will, AI-powered enterprise products should let it keep its stronghold on corporate clients.
As recession-resistant as tech comes
One thing that separates Microsoft from many big tech peers is that it's much more ingrained into the corporate and business world.
Lots of companies use Windows PCs for daily work. Industries like finance and accounting would struggle mightily to adjust to life without Excel. Cloud services are no longer optional, especially for companies operating online. LinkedIn has become the go-to spot for job searching and recruiting. The list goes on and on.
When times get tough (recession, down periods, etc.), consumers typically slow down their spending, especially on consumer discretionary products and services. Fortunately for Microsoft, its corporate clients likely won't significantly decrease how much they spend with it.
It's much easier for a consumer to forgo the latest iPhone when money is tight versus a company ditching its cloud services and reverting back to in-house storage. Having products and services that sell regardless of macroeconomic conditions is a recipe for long-term success.
