Microsoft (MSFT 1.44%) was founded in 1975, and now, it's the world's second-largest company, with a valuation of $2.5 trillion. It has always been a dominant force in the technology industry, but it took a relentless focus on innovation to get there.
Microsoft started out as a software provider, and its Windows operating system is still used by billions of people today. But one product isn't enough to sustain a position at the top of the fast-moving tech sector, so the company has since moved into hardware devices, gaming, cloud computing, and now, artificial intelligence (AI).
AI is perhaps Microsoft's greatest opportunity, and it has spent much of this year weaving the technology throughout its product portfolio. The company just reported its financial results for the fiscal 2024 first quarter (ended Sept. 30), and it's clear that AI is already driving growth in several areas.
Here's why there's still time for investors to buy Microsoft stock and ride this exciting wave.
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Microsoft is leaning on its cloud division to deliver AI to thousands of businesses
Cloud computing involves companies like Microsoft managing centralized data centers and renting that computing power to millions of business customers. The cloud is where most organizations now store their valuable data and digital assets, and it has also become the home of AI development.
In his conference call with investors this week, Microsoft CEO Satya Nadella said his company has a greater footprint than any other cloud platform (even though Amazon Web Services generates more revenue), covering more than 60 regions worldwide. He also said Microsoft has "the most comprehensive infrastructure" for AI training and inference, powered by Nvidia's latest specialized chips designed for those purposes.
Serving the needs of AI developers will be critical to the success of cloud platforms going forward. To accelerate its progress, Microsoft invested $10 billion in ChatGPT creator OpenAI earlier this year. The goal was to integrate OpenAI's technology throughout Microsoft's product portfolio, and that process is moving ahead. ChatGPT already powers AI features for the Bing search engine, the Edge internet browser, the 365 document suite, and even Windows.
But OpenAI's latest GPT-4 technology is also available to Microsoft's cloud customers on its Azure platform through a segment called Azure OpenAI Service.
The company had 18,000 business customers in the fiscal 2024 first quarter, up from 11,000 just three months prior. Therefore, not only is Microsoft providing businesses with AI-capable computing power through its data centers, but it's also delivering ready-made models for them to build upon, accelerating their own AI aspirations.
The cloud and AI drove strong revenue growth for Microsoft in Q1
The cloud is Microsoft's growth engine, and AI is becoming increasingly important to the segment.
The company generated $56.5 billion in total revenue during Q1, which was an increase of 13% year over year. But revenue generated by the Azure cloud platform grew by a much faster 29%, marking an acceleration compared to the prior two quarters. According to management, AI services accounted for three percentage points of that growth. In the prior quarter, just a few months ago, that figure was one percentage point. So, AI is clearly generating revenue at a rapid pace.
However, the impact of AI on Microsoft's financial results will likely expand further as it ramps up monetization efforts for new services like Copilot, which injects an AI assistant into programs like Word, Excel, PowerPoint, and Outlook. Microsoft said tens of thousands of employees at Fortune 100 companies are already using Copilot in the early-access program, and it will be released more broadly from next week.
Considering it will be priced at $30 per user, Copilot for enterprises could be an incredibly lucrative product.
Why Microsoft stock is a buy now
Setting aside the incredible progress Microsoft made on AI, the company found a way to carefully manage costs in Q1 to deliver a healthy bottom-line profit. This is a large and complex organization, but at a high level, Microsoft held costs like marketing and research and development flat compared to the same time last year.
Given revenue grew at the same time, it led to $2.99 in earnings per share (profit) for the quarter, an increase of 27% year over year and above what Wall Street analysts were expecting. It takes Microsoft's trailing-12-month earnings per share to $10.33. And based on its current stock price of $341.44, that translates to a price-to-earnings (P/E) ratio of 33.
That's a slight premium to the 29.9 P/E of the Nasdaq-100 technology index, which is filled with Microsoft's peers. However, almost none of them offer such a high amount of exposure to AI -- nor are they monetizing the technology as well as Microsoft is. In fact, one of Microsoft's key AI rivals is Google parent Alphabet, and that company's cloud business (and AI efforts) underwhelmed investors in the most recent quarter.
Microsoft is cementing itself as a leader in AI, and since the company is still launching new products into the market, it certainly isn't too late for investors to buy its stock for the long term.
