Despite Microsoft (MSFT -1.29%) being a $2.5 trillion company, the growth it is putting up is mind-boggling. One may think that the law of large numbers, which states that it becomes harder to grow the larger you get, would apply, but that's not the case for Microsoft.
Microsoft's first quarter of fiscal year 2024 (ending Sept. 30) was jaw-dropping, to say the least. But does it cement Microsoft's case as a truly unstoppable company? Let's find out.
Cloud computing and AI are massive growth drivers
Microsoft may be most well known for its Office products installed on nearly every computer. But it's quickly becoming more of an artificial intelligence (AI) and cloud computing investment.
Of its three divisions, Intelligent Cloud is by far the largest, as it brought in $24.3 billion in Q1.
Figures in billions of dollars.
But what's most impressive is its growth rate: 19%, the fastest of any segment. So not only is this the largest, it's the fastest growing, which is a great combination. Within the division is its cloud computing division, Azure, which has been the source of Microsoft's growth over the past few years. Azure itself posted an impressive 29% revenue growth, which bested its primary competition, Alphabet's Google Cloud and Amazon's AWS.
Cloud computing is a huge part of Microsoft's future, as cloud workloads are projected to rise over the next decade. If Microsoft can secure a large chunk of this share, it will set itself up nicely for the future.
Another part of the Microsoft investment thesis is its Copilot product. This can be deployed by programmers, which improves productivity by up to 55%. It's also rolling this product out to everyday products like Word and Excel, opening up a much broader audience base. The cost of Copilot is $30 per user per month, which may seem steep, but if it improves productivity like Microsoft claims it can, it will be well worth it.
Should Microsoft sign on a small customer cohort, this could be another significant growth driver for the company. If the product is a hit, Microsoft could be sitting on a gold mine.
It's this combination of AI and cloud computing that makes Microsoft an exciting investment and likely an unstoppable company. Microsoft's resources are practically unparalleled, with significant momentum in this field. But is it a good investment now?
Microsoft trades at a hefty premium, but it may be worth it
With how strongly Microsoft is executing, it's no surprise the stock trades at a premium.
MSFT PE Ratio data by YCharts
But 34 times trailing earnings and 31 times forward earnings is a hefty price tag to pay for the stock, especially considering the S&P 500 trades at 25 times trailing and 18 times forward earnings. So the question is, is Microsoft worth that much of a premium?
With Microsoft's recent execution plus the upside of cloud computing and AI, the future is bright for the company. It's not often you can find a company growing revenue at 13% and net income at 27% at the scale Microsoft is. In fact, there are really no other companies doing it.
Microsoft truly is a one-of-a-kind investment in the market and can make an excellent bedrock position in an investor's portfolio. In any case, investors must be patient with Microsoft because Azure and AI are products that won't be fully integrated for more than five years.
So, if you buy Microsoft stock, which looks like a great idea, you'll need to commit to the stock for a while. But with Microsoft's track record, the ride should be smooth.
