When it comes to Big Tech and artificial intelligence (AI), investors could argue that Microsoft (MSFT -3.21%) is quickly becoming the undisputed leader. After a $10 billion investment in OpenAI earlier this year, Microsoft has quickly integrated various AI-powered features across is ecosystem.
The company just reported earnings for the first quarter of fiscal 2024, ended Sept. 30. As usual, Microsoft's Azure cloud business stole the spotlight. However, what made this quarter different than prior periods was management's detail around how much AI influenced growth in Azure. Moreover, investors learned about other areas that Microsoft plans to augment through AI.
Let's dig into the report and assess if Microsoft stock looks like a good buy right now.
AI is fueling growth on all cylinders
Microsoft breaks its revenue into three core areas: productivity and business processes, intelligent cloud, and personal computing. Within those three areas are a number of sub-segments. However, the category that investors seem to care about most is the cloud.
For the latest quarter, Microsoft's revenue in intelligent cloud increased 19% year over year to $24.3 billion. The big tailwind for intelligent cloud was the 29% growth that Microsoft generated from Azure. Perhaps most important is that of this 29% growth, 3 percentage points were driven by AI, according to management.
In one of the more encouraging moments of the earnings call, CFO Amy Hood noted that "higher than expected AI consumption contributed to revenue growth in Azure." This statement really drives home how much demand there is for AI. While this interest could be a little difficult to forecast, early signs are showing that Microsoft has been a major beneficiary. I believe that the company's success is predicated on its mission to layer generative AI across its entire business.
Management has guided for Azure sales growth of 26% to 27% in its fiscal second quarter. My suspicion is that this could be a little conservative based on some of the commentary above. Moreover, despite the effects of lingering inflation and high borrowing costs on businesses of all sizes, Microsoft has shown clear signs of resiliency and strength even during somewhat turbulent macroeconomic conditions.
In fact, some on Wall Street believe the party is just getting started and that Microsoft could unlock $100 billion of additional value from new AI-powered services that are yet to be commercially available.
Image source: Getty Images.
Is Microsoft's valuation compelling?
There are many different ways to value a stock. Given that Microsoft is one of the biggest companies in the world by market capitalization, I've chosen to benchmark the company against other large-cap technology stocks: Apple, Amazon, and Alphabet.
MSFT PE Ratio (Forward) data by YCharts
The graph above illustrates the forward price-to-earnings (P/E) multiple for Microsoft stock and its cohorts. Investors can see that Microsoft's forward P/E is right in the middle of its competitors. It's not entirely surprising that Microsoft is commanding a premium over Alphabet and Apple based on this measure. Apple's revenue has consistently declined over the last several quarters.
What surprises me, however, is the disparity in forward P/E between Amazon and Microsoft. While Amazon dominates cloud computing via its Amazon Web Services platform, Microsoft is not far behind and its recent earnings report only further underscores how much potential Azure has. Moreover, Amazon only recently found its name in the AI headlines following its investment in Anthropic -- which happened many months after Alphabet invested in the same company and Microsoft made its deal with OpenAI.
While the full potential of AI is largely unknown, Microsoft has shown in a relatively short time frame that demand is high. I surmise that, eventually, AI will become deeply native to all of Microsoft's products and services within its operating system. I would buy Microsoft stock at these levels primarily due to Azure's success and its long-term potential. To me, Microsoft stock looks like a bargain right now.
