Microsoft (MSFT 1.82%) came public in 1986 with a valuation of $777 million, and it's now the most valuable company in the entire world, sporting a valuation of $3.1 trillion. That means investors who bought Microsoft stock at its initial public offering (IPO) and held until now would be sitting on a gain of 402,731% (excluding dividends).
That would have been enough to turn a $250 investment back in 1986 into more than $1.1 million today! By comparison, the same investment in the S&P 500 index would be worth just $5,630 today.
Microsoft was founded as a software company, but it has since expanded into a number of different segments including computer hardware, gaming, cloud services, and artificial intelligence (AI). The AI opportunity is forecast to be worth trillions of dollars, and here's how it could help Microsoft mint more millionaires in the future.
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Microsoft has a 49-year track record of innovation
Microsoft was founded in 1975, and it developed the operating system for IBM's first personal computer by 1980. It laid the groundwork for what would eventually become the Windows operating system, which was launched in 1985 and is now installed on 1.6 billion active devices.
Microsoft 365 is another software success story. Originally called "Office," it includes applications like Word, Excel, PowerPoint, Outlook, and Teams, which are used by more than 1 billion people. These productivity tools are becoming important distribution channels for Microsoft's expansion into AI, which I'll discuss in more detail shortly.
Software is just one part of Microsoft's business today. The company is also home to the Xbox gaming ecosystem, and it acquired game development giant Activision Blizzard for $69 billion last year (it owns popular titles like World of Warcraft, Call of Duty, and Diablo).
Microsoft also sells billions of dollars worth of its Surface notebook computers and devices each year, which proves the company can also succeed in the hardware space.
But many investors are laser-focused on Microsoft's cloud computing segment, which is home to the Azure platform. Azure provides hundreds of digital services to businesses all over the world. These offerings are designed to help customers store data, host websites, develop software, and even access AI, among other things.
Artificial intelligence could transform Microsoft's business
In 2019, Microsoft invested $1 billion in a little-known start-up called OpenAI. It agreed to inject a further $10 billion in early 2023 when OpenAI's ChatGPT online chatbot captured global attention. Microsoft is now weaving a combination of its own AI models and OpenAI's latest GPT-4 models into its entire product portfolio.
Copilot is Microsoft's AI-powered virtual assistant. It can answer complex questions, create content, and even write computer code. It's available on Windows, 365, Azure, the Edge internet browser, and the Bing search engine, and it could transform the company's economics.
Copilot for 365 can accelerate productivity in applications like Word and Excel. The corporate sector pays for more than 400 million 365 seats for their employees, which cost $12.50 per user, per month on the standard plan and $22 per user, per month on the premium plan. Microsoft charges an additional $30 per user, per month to include Copilot, so the financial opportunity is staggering.
Cloud computing is the largest of Microsoft's three core segments by revenue. The company offers OpenAI's GPT-4 models to its business customers on Azure, who can use them to develop their own AI applications. It also operates data centers powered by Nvidia's latest GPU chips, which organizations can rent to ensure they have the required computing power to develop those applications.
Microsoft had 53,000 Azure AI customers in the recent fiscal 2024 second quarter (ended Dec. 31), and one-third of them weren't Azure customers at all 12 months ago. Therefore, AI has become a key source of customer acquisition for Azure. The segment's revenue increased by 30% year over year in Q2, with 6 percentage points of that growth coming from AI specifically. That was double the contribution AI made just three months earlier.
Microsoft could mint more millionaires over the long term
To be clear, investing $250 in Microsoft stock today will probably never yield a $1.1 million return 38 years later because the company is simply too large. The best returns are almost certainly in the rearview mirror, but that doesn't mean Microsoft can't mint new millionaires -- it just means investors will have to outlay a larger sum of money.
Microsoft's revenue is forecast to come in at $244.3 billion in fiscal 2024 (ending June 30), and based on the company's $3.1 trillion valuation, it will place the stock at a price-to-sales (P/S) ratio of 12.7. Assuming that P/S ratio remains constant, the shares could deliver a fivefold return over the next 20 years if the tech titan can increase its annual revenue fivefold.
To do so, Microsoft will have to grow its revenue by 8.4% every year, eventually reaching $1.2 trillion by 2044. The company has grown its sales at a compound annual rate of 20.6% since 1986, which is well beyond that threshold, and even its forecast fiscal 2024 revenue will represent a 15.3% year-over-year increase.
Artificial intelligence is the big unknown. Goldman Sachs estimates the technology could add $7 trillion to the global economy in the coming decade. PwC thinks it will increase global economic activity by $15.7 trillion by 2030, and Cathie Wood's Ark Invest places that figure at $200 trillion. That's a gigantic opportunity, and it could even drive an acceleration in Microsoft's revenue growth.
Nevertheless, even if Microsoft's expansion slows significantly from here, its stock could still deliver a fivefold return in the next 20 years to potentially make a millionaire out of any investor who outlays $200,000 today.
