The past few years have been fraught with uncertainty for Microsoft (MSFT -1.34%) investors. However, following last year's beatdown, it appears the tech titan has found its way back into investors' good graces. After losing as much as 34% of its value last year, Microsoft stock has rebounded, gaining 44% so far this year (as of this writing).
While the personal computing market -- which has historically made up nearly one-third of Microsoft's revenue -- has yet to rebound, the company has turned its focus to a more potent catalyst to drive future growth: artificial intelligence (AI). The ongoing paradigm shift in the technology landscape has some investors wondering what it all means for the software specialist's future. Here are a few things the smartest investors know about Microsoft.
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1. A cloud contender
While Amazon Web Services (AWS) has long held the cloud computing crown, its lead no longer seems as insurmountable as it once did. During the downturn, cloud adoption slowed, yet Microsoft was able to gain ground on its rival. In the second quarter, AWS controlled 30% of worldwide cloud infrastructure spending, but grew just 12% year over year, according to research firm Canalys. For its part, Microsoft Azure commanded 26% of the market, while growing 26% year over year, which shows it continued to steal share from AWS.
While the final calculations for the third quarter aren't yet available, that trend likely continued. For Q3, AWS maintained its 12% growth rate, while Azure accelerated to 29%, suggesting it narrowed the gap.
If things continue at this rate -- and there's every reason to believe they will -- it won't be very long before Microsoft steals the lead in the worldwide cloud infrastructure market.
2. $100 billion opportunity?
While the market for artificial intelligence is no doubt vast, it's difficult to pin down exactly how much it's worth. While most experts agree the figure could ultimately be in the trillions, estimates vary wildly and there's no way to know for sure how the proceeds will be distributed.
The company recently released Microsoft 365 Copilot, a suite of AI tools for its software-as-a-service (SaaS) customers and cloud infrastructure users. Thus far, 40% of the Fortune 100 have implemented Copilot via Microsoft's early access program. That bodes well for its general release, which is slated to begin this week.
Being quick off the mark has put Microsoft in the driver's seat, giving it a first-mover advantage for the adoption of AI software. Estimates have just begun to trickle in, but the numbers are stunning. Dan Loeb of hedge fund Third Point suggests Copilot could help Microsoft add $25 billion to its revenue from software sales alone over the next few years. Evercore ISI analyst Kirk Materne is much more bullish, estimating that its AI offerings could generate $100 billion in incremental revenue by 2027. That sentiment was recently echoed by Piper Sandler analysts, who suggest that Copilot has a "$100 billion-plus scale potential longer term."
While those estimates might seem pie in the sky, CFO Amy Hood provided a number that's much easier to digest, saying, "The next-generation AI business will be the fastest-growing $10 billion business in our history."
Whatever the case, it's still early days, and Microsoft is well-positioned to earn its share of this lucrative opportunity.
3. A rebound in the PC market is right around the corner
One of the strengths of Microsoft's business is the diversity of its operations. This way, if one segment is struggling, the others can pick up the slack.
That's been the case over the past couple of years, as the market for personal computers (PCs) has fallen off a cliff. The work-from-home trend during the pandemic led to a spike in demand for PCs. The short-term market saturation and the ensuing macroeconomic downturn wreaked havoc on the PC market, which has suffered year-over-year sales declines for eight successive quarters.
In Q3, worldwide PC shipments of 64.3 million units slipped 9% year over year, according to data compiled by market research firm Gartner. However, this dark cloud has a silver lining: Gartner expects growth to make a long-awaited reappearance in the fourth quarter. "There is evidence that the PC market's decline has finally bottomed out," said Mikako Kitagawa, director analyst at Gartner.
This bodes well for Microsoft, which has historically earned roughly one-third of its sales from the more personal computing segment, which includes its Windows operating system (OS) and Surface devices. This segment has been the company's weakest performer over the past two years, but a rebound in PC sales will translate into greater revenue and profit for Microsoft.
The total package
Longtime followers of Microsoft will note that the company has a rich history of adapting itself to a changing technological landscape. The company's cloud computing service and SaaS offerings paved the way for its decisive move into AI, which could drive additional cloud growth for the coming decade and beyond.
To be clear, Microsoft stock is no longer cheap, trading at roughly 31 times forward earnings compared to a price-to-earnings ratio of 24 for the S&P 500. However, when viewed in terms of the company's opportunity in both AI and cloud computing, I'd suggest that Microsoft stock is worth every penny.
