Shares in Microsoft (MSFT 0.22%) have popped 35% since May 2023, rallying investors with consistent growth across its business and an expanding position in artificial intelligence (AI).
Microsoft has come a long way since its founding nearly 50 years ago. The company is a king in software, attracting billions of users to products like Windows, its Office productivity suite, various Xbox offerings, LinkedIn, and its cloud platform Azure. The success of these products has catapulted Microsoft to being the world's most-valuable company, with a market cap above $3 trillion.
However, recent developments indicate the company is still nowhere near hitting its ceiling. Microsoft has gotten a head start in AI that could see it surpass its rivals. Meanwhile, the tech giant is benefiting from the tailwinds of multiple other markets.
So, here's why Microsoft is a screaming buy right now.
Solid growth from multiple segments
Microsoft posted its third quarter of 2024 (ending March 2024) earnings on April 25. The company's revenue rose 17% year over year to $62 billion, beating analysts' expectations by more than $1 billion. Meanwhile, operating income climbed 23% to just under $28 billion.
The Windows company delivered double-digit growth in all of its segments. Microsoft's Productivity and Business Processes division benefited from a spike in Office 365 commercial revenue, illustrating the potency of platforms like Word, Excel, PowerPoint, Teams, Outlook, and more. The company has become the go-to for businesses worldwide and could expand further in the industry as it introduces new AI features across its productivity lineup.
During the quarter, Microsoft also enjoyed a 17% year-over-year rise in its More Personal Computing segment. The company attributed the growth to a 51% increase in gaming revenue. The boost comes after Microsoft's Xbox brand purchased game developer Activision Blizzard last October for a historic $68 billion.
The acquisition brought highly profitable game franchises like Call of Duty, Overwatch, and World of Warcraft into Microsoft's fold. Recent earnings indicate the purchase was a smart move, with the company having barely scratched the surface of what is possible with Activision's valuable game library.
However, Microsoft's biggest growth catalysts going forward will likely be its cloud platform, Azure, as it continues to expand in AI.
Microsoft is taking full advantage of its head start in AI
Microsoft was an early investor in AI, providing $1 billion to ChatGPT developer OpenAI back in 2019. The company has since upped that investment to about $13 billion, granting Microsoft exclusive access to some of the industry's most advanced AI models.
The partnership allowed Microsoft a head start in the sector over rivals Amazon and Alphabet, which scrambled to catch up last year. As a result, Azure's cloud-market share has begun gaining on Amazon Web Services (AWS), the world's largest cloud platform. In Q4 2023, AWS lost 2% of its market share, while Azure gained 2%.
Meanwhile, Microsoft's Intelligence Cloud segment saw revenue increase by 21% year over year in its latest quarter, while AWS sales rose 17% during the same period.
In addition to new cloud services, Microsoft has gradually introduced AI features to many of its products. The company has integrated parts of ChatGPT into its search engine Bing, introduced generative features to platforms like Word and PowerPoint, and launched an AI assistant called Copilot to Microsoft 365. Copilot debuted last year as a $30 per-month add-on to a 365 subscription as the company moves to monetize its AI efforts.
Data by YCharts.
Microsoft's stock is trading at nearly 36 times its earnings. However, with the same metric for Amazon at 41, Microsoft is at least a better bargain than its biggest cloud rival. Meanwhile, the chart above shows Microsoft has outperformed many of AI's most prominent players in free cash flow.
The figures indicate Microsoft is potentially best equipped to continue expanding in AI and overcome potential headwinds. Alongside promising growth in productivity software and gaming, Microsoft's stock is well worth its premium price and is a screaming buy right now.
