Microsoft (MSFT -0.18%) has been in fine form on the stock market in 2023, with impressive gains of 38% so far. This surge has helped the tech giant increase its market cap substantially.
The company now sports a market cap of just under $2.5 trillion. That's a nice increase over it's market cap of around $1.8 trillion at the beginning of the year. And now Dan Ives of Wedbush Securities estimates that Microsoft could become a $3 trillion company in early 2024. Ives points out that Microsoft's monetization of its artificial intelligence (AI) offerings should play a central role in helping it hit that milestone.
Given that Microsoft stock needs to jump another 20% or so from current levels to get to a $3 trillion market capitalization, there is a good chance that it reaches that mark in the next few months, especially considering the progress it is making with its AI services.
Here's how AI could supercharge Microsoft's growth
Microsoft will release its fiscal 2023 fourth-quarter results (for the three months ended June 30) later this month. According to consensus estimates, Microsoft is expected to finish the fiscal year with $211 billion in revenue, an increase of 6% over fiscal 2022. The company has clocked 6% revenue growth in the first nine months of the fiscal year despite facing a headwind in the form of weak personal computer (PC) demand.
Microsoft's revenue from the More Personal Computing segment was down 9% year over year in the third quarter of fiscal 2023, driven by a 28% decline in Windows revenue and a 30% decline in revenue from sales of devices. The company recorded impressive double-digit growth in the other two segments, which is where its AI services have already started making an impact.
For instance, Microsoft's revenue from the Productivity and Business Processes segment was up 11% year over year in the last reported quarter to $17.5 billion. This segment's growth was driven by the increasing adoption of the company's Office suite of productivity and collaboration solutions, which are used by both individuals and enterprises.
Microsoft is giving its Office applications the AI treatment, and this could help the company attract more customers to the platform. Microsoft's Copilot generative AI application is now embedded in the popular Word, PowerPoint, and Excel applications, with the aim of helping users create text and presentations and analyze data with text prompts.
Additionally, Copilot's Business Chat accesses data from multiple applications such as calendars, emails, documents, chats, meetings, and contacts to generate responses to users' queries. For instance, users can simply ask Business Chat to create a summary of a meeting they were in using this application, among other things.
Microsoft controlled close to 50% of the global office productivity software market last year, with Alphabet being the other major player. The addition of generative AI could help Microsoft maintain its solid position in this space, or even gain market share from its rival, as Alphabet is still finding its feet in this market.
Generative AI could supercharge Microsoft's cloud business as well. The company's revenue from the cloud business was up 16% year over year in the third quarter of fiscal 2023 to $22 billion. It wouldn't be surprising to see it accelerate, as Microsoft is already offering access to large language models (LLMs) on the Azure cloud service.
Microsoft's Azure OpenAI Service gives enterprises access to LLMs such as GPT-4, Codex, DALL-E, and ChatGPT to develop customized applications based on their needs. For example, users of this service can create chatbots for customer service applications, write articles or reports, gain insights from unstructured data, and generate code, among other things.
Microsoft points out that the OpenAI Service gained traction in multiple industries, ranging from healthcare to financial services to manufacturing to oil and gas. Microsoft charges its customers on a pay-as-you-go consumption model for access to this service, which means that they don't need to invest in expensive hardware to train AI models.
With the generative AI market expected to post 34% annual growth through the next decade, Microsoft should ideally see a spurt in demand for its Azure OpenAI platform since it gives customers a way to develop generative AI solutions without breaking the bank.
The tech giant's growth is expected to accelerate
Microsoft will release its fiscal 2023 results (for the year ended June 30) later this month. We've seen that the company is expected to finish the previous year with mid-single-digit revenue growth. However, Microsoft's growth is expected to accelerate from the new fiscal year, as the following chart indicates.
MSFT Revenue Estimates for Next Fiscal Year data by YCharts
Microsoft is currently trading at 12 times sales, so a $266 billion revenue figure could take it past a $3 trillion market cap. What's more, Microsoft stock carries a Street-high price target of $450, which suggests 35% upside from current levels. If Microsoft hits that mark, it could easily join the $3 trillion market cap club.
In all, Microsoft is on track to hit that milestone eventually, which is why investors would do well to buy the stock right away. Microsoft's sales multiple is quite reasonable when compared to those of other AI stocks such as Nvidia or C3.ai. Additionally, it is trading at 30 times forward earnings, which is again significantly below the multiple of other AI players.
So investors looking for an AI stock trading at a reasonable valuation should consider buying Microsoft hand over fist, since it seems built for more upside.
