Microsoft's (MSFT -0.18%) stock is trading near its all-time high as of this writing. The tech giant's stock has soared more than 900% over the past 10 years as Satya Nadella, who took the helm as Microsoft's third CEO in early 2014, boldly expanded its cloud ecosystem, rebooted its mobile strategy, and strengthened its gaming and hardware businesses. Microsoft's investments in OpenAI and the integration of its artificial intelligence (AI) tools into its own search and cloud services also made it an appealing way to profit from the explosive growth of the generative AI market.
From fiscal 2013 to fiscal 2023 (which ended this June), its revenue and earnings per share (EPS) rose at compound annual growth rates (CAGR) of 11% and 14%, respectively. That robust growth silenced the bears who claimed its high-growth days were over.
Microsoft CEO Satya Nadella. Image source: Microsoft.
Microsoft's growth probably won't cool off anytime soon. From fiscal 2023 to fiscal 2026, analysts expect its revenue and EPS to grow at CAGRs of 14% and 16%, respectively, as it continues to expand its cloud, AI, and gaming ecosystems. We should take those estimates with a grain of salt, but these three green flags suggest it's still on the right rack.
1. The accelerating growth of its cloud business
Microsoft's Azure controlled 25% of the global cloud infrastructure services market in the third quarter of 2023, according to Canalys. That puts it in second place behind Amazon Web Services (AWS), which controls 31% of the market, and far ahead of Alphabet's Google Cloud Platform (GCP), which ranks third with a 10% market share. Azure grew its market share by 3 percentage points year over year in the second quarter as AWS' share shrank by 1 percentage point. GCP also grew its market share by a single percentage point.
Azure is also growing faster than AWS and GCP, even as the macro headwinds drive many companies to rein in their cloud spending. In Microsoft's latest quarter, its "Azure and other cloud services" revenue rose 29% year over year and accelerated from its 26% growth in the previous quarter. AWS' revenue only rose 12% year over year in its latest quarter, which held steady from the previous quarter, as GCP's revenue grew 22% and cooled from its 28% growth in the previous quarter.
Azure's accelerating growth and market share gains were likely driven by two catalysts: the integration of OpenAI's tools into its own cloud services, which gave it an AI edge against AWS and GCP; and demand from companies -- particularly retailers, media companies, and advertising companies -- that didn't want to tether themselves to Amazon or Google.
2. The end of the OpenAI drama
When OpenAI unexpectedly fired its co-founder and CEO Sam Altman on Nov. 17, it cast dark clouds over Microsoft's future cloud and AI plans. Microsoft initially tried to contain the damage by hiring Altman to lead a new AI team at the company. It also left its door open for any OpenAI employees who wanted to join the new group.
At the time, that seemed like the best possible outcome for Microsoft. It would prevent Altman from joining a competitor like Amazon or Google, and it would expand its own AI team with hundreds of new employees from OpenAI. And since Microsoft already held an exclusive multiyear cloud agreement with OpenAI, it would be acquiring the best parts of the company -- which had been seeking an $86 billion valuation prior to Altman's firing -- without an actual takeover.
But on Nov. 22, Altman was reinstated as OpenAI's CEO and most of its original board was dismissed. That was arguably an even better outcome for Microsoft because its original cloud deal remains intact, it doesn't need to bring in more employees, and it could reportedly gain a seat on OpenAI's new board of directors to prevent another coup from happening.
3. It finally closed the Activision Blizzard deal
Last but not least, Microsoft finally closed its $69 billion takeover of Activision Blizzard in October. That historic deal, which was closely scrutinized by antitrust regulators across the world, makes it the world's third-largest video game publisher by annual revenue after Tencent and Sony.
Microsoft's takeover of Activision Blizzard adds evergreen franchises like Call of Duty, World of Warcraft, Diablo, and Candy Crush to its Xbox gaming business -- which already owns Zenimax Media (Doom, Fallout, Elder Scrolls), Mojang (Minecraft), 343 Studios (Halo), and other established studios.
That deep portfolio of well-known games supports Xbox's expansion of its subscription-based Game Pass and Cloud Gaming services. The evolution of Xbox from a console into a service could lock in more gamers and widen its competitive moat.
Microsoft still has a bright future
Microsoft's stock might seem a bit pricey at 34 times forward earnings, but I believe its robust growth and Nadella's shrewd expansion strategies justify that premium valuation. Investors who are looking for a balanced play on the cloud, AI, and gaming sectors should still consider Microsoft to be a promising long-term investment in all three markets.
