The pace at which artificial intelligence (AI) has become the dominant trend in technology has been truly astounding to watch. AI has been part of our everyday lives for years now, underpinning everything from online searches to mapping programs and from smart home devices to product and streaming recommendations. Yet recent developments in generative AI have taken these algorithms to the next level.
At the Microsoft (MSFT 0.22%) Build developers conference this week, CEO Satya Nadella addressed these advances, calling this the "golden age" of AI. He then asked this rhetorical question: "In a world where we have this ever-increasing information about people, places, and things, can computers help us reason, plan, and act more effectively on all that information?" As recent developments have made clear, the answer is a resounding "yes."
The spread of AI will result in a windfall for the companies best positioned to leverage this groundbreaking technology. The global AI market was estimated at $2.4 trillion in 2023 and is expected to climb to $30.1 trillion over the ensuing decade, according to Expert Market Research.
My portfolio is chock-full of AI stocks, but Microsoft is among those I'm most excited about right now.
Image source: Getty Images.
Ringing the cash register
Many companies are moving quickly to adopt AI, but it may well have been Microsoft that sparked this mad rush. The company's $13 billion stake in ChatGPT creator OpenAI gave it early access to these advanced algorithms, which it quickly infused into many of its products and services.
The poster child for these efforts is Microsoft Copilot, the company's growing suite of AI-powered digital assistants. What began as an experiment at GitHub soon morphed into a full-blown AI strategy. In addition to Copilots for GitHub and Microsoft 365, there are AI-fueled assistants for sales, service, and finance, with more on the drawing board.
Customers pay $30 per user per month for Microsoft 365 Copilot, and the company says adoption has been strong. While it hasn't shared precise numbers, several analysts have calculated that Copilot could be worth as much as $100 billion in annual revenue over the next few years.
Cloudy with a chance of profits
Copilot isn't the only way Microsoft is playing the AI card to boost its business. While the company has long trailed Amazon Web Services (AWS) in the cloud infrastructure space, recent moves in AI have helped Microsoft gain ground.
In Microsoft's fiscal 2024 third quarter (ended March 31), Azure Cloud took market share at the expense of the competition, climbing 31% year over year, outpacing AWS and Alphabet's Google Cloud, which grew 17% and 28%, respectively. Microsoft said AI services "contributed seven points" to Azure's growth.
Furthermore, in the calendar first quarter, AWS, Azure, and Google Cloud controlled 31%, 25%, and 10%, respectively, of global cloud infrastructure spending, according to market research firm Canalys. If Microsoft can continue to steal share from the competition, it could eventually become the cloud infrastructure leader.
Other opportunities abound
Back in 2016, Nadella said that "AI is at the intersection of [Microsoft's] ambitions." It seems that nearly a decade ago, Microsoft was setting the stage for the AI revolution to come. That said, the company is making the most of its prescient moves.
One example is the company's personal computing (PC) segment. The business is cyclical, and the last big upgrade cycle occurred at the peak of the pandemic, roughly four years ago. That was followed by the worst economic downturn in more than a decade, convincing PC owners to keep those devices a bit longer.
PC sales have finally begun growing again, so it's no coincidence that Microsoft just unveiled its line of Copilot+ PCs, which feature the company's AI-powered assistant and process many AI functions locally. This should help fuel what's already expected to be a robust demand cycle over the next couple of years.
Despite generating gains of 35% over the past year, Microsoft's valuation is still fairly reasonable, selling for 37 times earnings. While that represents a premium to the multiple of 28 for the S&P 500, the company's track record of growth and the magnitude of the AI opportunity suggests it's worthy of a premium.
