There are mixed signals on Wall Street these days, causing market watchers to debate the state of the current rebound. Yet from a historical perspective, every bear market has been followed by an even stronger bull market -- and there's evidence that suggests that one may have started already.
The S&P 500 has already notched gains of more than 20% since the bear market trough in October, which is one sign of an impending bull market. Once the index reaches new heights -- just 9% higher than where it stands today -- any lingering questions of whether we're in a bull market will be put to rest.
Furthermore, while some companies were stopped dead in their tracks by the worst downturn in more than a decade, others proved their mettle by continuing to notch impressive growth. One such unstoppable stock was Microsoft (MSFT 1.57%), and despite its 39% gains so far this year, the evidence suggests the company's best days are yet to come.
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A long-awaited rebound in the consumer PC market
Microsoft has historically made nearly one-third of its revenue from its more personal computing segment, but in recent years, that business has fallen on hard times. At the onset of the pandemic, working from home became the rule rather than the exception, leading to a spike in demand for personal computers (PCs).
The resulting market saturation and subsequent economic downturn has weighed on growth ever since. Last year, PC shipments slumped to the lowest level since 2008, according to market intelligence provider IDC. But there are finally green sprouts of growth.
PC shipments are expected to climb nearly 4% year over year in 2024, according to IDC. Furthermore, the debut of more robust processors, the coming end of support for Windows 10, and consumer adoption of generative AI are all expected to give the industry a boost over the next few years.
During Microsoft's fiscal 2023 (ended June 30), revenue for the more personal computing segment declined to $54.7 billion, down 9% and offsetting gains from the rest of its business. Once a recovery in the PC market begins in earnest, it will eliminate that headwind from Microsoft's results, which should help push the stock higher.
You can't spell gains without AI
Microsoft was quick to recognize the potential opportunity resulting from advances in generative AI, making a $13 billion investment in ChatGPT creator OpenAI.
Since then, Microsoft has been at the forefront of the movement, infusing AI capabilities across a broad swath of its paid products and services. While the magnitude of these moves is still unclear, the impact on its financial results could be substantial.
Dan Loeb of hedge fund Third Point believes that Microsoft's AI-assisted Office Copilot could boost the company's revenue by "$25 billion or more on software sales alone." A more enthusiastic estimate comes courtesy of Evercore ISI analyst Kirk Materne, who suggests Microsoft's AI efforts could generate $100 billion in incremental revenue by 2027.
Microsoft has only just begun to scratch the surface of the ways to profit from AI, with the company's Azure Cloud as the linchpin of that opportunity.
NASDAQ: MSFT
Key Data Points
Sunshine on a cloudy day
Azure has long played second fiddle to industry leader Amazon Web Services -- which controls 30% of the cloud infrastructure services market, according to industry analyst Canalys. However, Microsoft is the No. 2 provider at 26% and continues to gain ground on its rival. If this trend continues, it will eventually secure the lead.
Microsoft plans to leverage its recently debuted generative AI tools to encourage cloud users to switch, touting the resulting productivity enhancements. The company recently introduced a suite of AI-powered tools and announced the availability of Bing Chat Enterprise, its AI-infused search system. The company expects great things from its foray into AI. CFO Amy Hood proclaimed, "The next-generation AI business will be the fastest-growing $10 billion business in our history."
Much of that will come directly from AI tools housed in Azure Cloud.
Buy Microsoft hand over fist
Those who invest in Microsoft stock now are getting plenty of growth potential. The company offers a unique combination of recurring revenue from its software-as-a-service (SaaS) and cloud computing businesses, as well as strong exposure to AI. The expected rebound in the PC industry provides yet another catalyst for a company rife with opportunity.
Despite its potential, Microsoft stock is still reasonably priced, selling for 30 times forward earnings and 9 times next year's sales. While that's a slight premium to the market averages, I would suggest it's a relative bargain, considering the company's future potential.
That's why investors should be buying Microsoft stock hand over fist and holding it forever.
