Microsoft (MSFT -3.21%) has quietly had a tremendous run as a stock, up about 65% in the last year. Part of this rise is the frenzy of artificial intelligence (AI) investing, as Microsoft positioned itself at the forefront of this exciting trend.
While Microsoft may not be as exposed as other companies like Nvidia, it still plays a huge role in the rollout of AI to the average worker. But does this position make Microsoft a top AI investment right now?
Microsoft's AI products integrate into its already dominant product line
Most people know Microsoft's products as they use them daily in their jobs. However, Microsoft aims to make these workers more efficient by integrating AI.
Microsoft partnered with OpenAI to integrate ChatGPT into many products. Microsoft Copilot is available for businesses as a $30 monthly add-on to Microsoft 365. While that may seem like a lot, it's a bargain.
If Copilot can make 100 employees 1% more efficient, it could replace one worker. The annual cost for Copilot for these 100 workers would be $36,000. Considering that the average salary in the U.S. in 2024 is just over $53,000 per year, according to the U.S. Bureau of Labor Statistics, this would be a significant cost savings. That's also a low-ball estimate, as its Copilot product can make employees more than 1% more efficient.
Additionally, Microsoft is highly exposed to the AI trend through its cloud computing product, Azure. Cloud computing is crucial in the proliferation of AI, allowing clients to rent out computing power. Most businesses don't require a supercomputer on hand to train AI models. Instead, they can offload some of that work to Microsoft's servers, which they can use by paying a rental fee.
Azure has been a powerhouse segment for Microsoft as it rose 30% in the fiscal second quarter of 2024 (ended Dec. 31). While Microsoft doesn't give individual segment results, its intelligent cloud division (which Azure is a part of) delivered $25.9 billion in revenue in the quarter, making it Microsoft's largest division.
Clearly, AI is having a big impact on Microsoft's business right now, and it has done well in positioning itself to take advantage of the move.
But is it a good investment?
Being a great company and a great investment are two different things
Microsoft undeniably checks the box as an excellent AI company. Its track record and product rollout speak for itself. However, this has caused Microsoft stock to earn a hefty premium compared to other stocks on the market. It's a very expensive stock with a price-to-earnings (P/E) ratio of 37 and a forward P/E of 35.
MSFT PE Ratio data by YCharts
For reference, AI powerhouse Nvidia trades at a lower forward P/E of 32. This illustrates how high the expectations are for Microsoft and raises some concerns about whether it will be able to hit expectations.
From a historical perspective, Microsoft's stock hasn't been this expensive (outside of a few years when its earnings were skewed) since the early 2000s, when Microsoft was caught up in the dot-com crash.
MSFT PE Ratio data by YCharts
I'm not saying Microsoft is due for a crash, but the stock is extremely pricey.
So, is Microsoft a good AI investment? I'd say no. The bar is set incredibly high to begin with, which will make it difficult for Microsoft stock to rise significantly.
Plus, with Microsoft already making up 7% of the S&P 500, I'm highly exposed to the stock through my 401(k) investments.
Microsoft is a great AI company, but its high price tag doesn't make it a great AI investment, at least for right now.
