Microsoft (MSFT +0.04%) stock has delivered impressive returns to investors recently, clocking gains of 95% since the beginning of last year. This solid surge has been driven by an acceleration in the tech giant's growth thanks to the growing adoption of its artificial intelligence (AI) solutions.
The good news is that Microsoft's AI-driven growth is just getting started, and it won't be surprising to see the proliferation of this technology leading to further impressive growth in revenue and earnings. Let's take a closer look at these growth drivers and see where they could take Microsoft over the next three years.
NASDAQ: MSFT
Key Data Points
Primed to deliver stronger growth
Microsoft just completed its fiscal 2024 on June 30. The company will release its quarterly results later this month, but its performance in the first nine months of its year and the latest guidance point toward a nice bump in its financial performance.
Microsoft generated $180.4 billion in revenue in the first nine months of fiscal 2024. Its fiscal fourth-quarter guidance of $64 billion indicates that it would have finished fiscal 2024 with a top line of just over $244 billion. That would be a 15% jump over fiscal 2023 revenue of $212 billion when Microsoft's top line increased 7% year over year.
More importantly, Microsoft is expected to maintain a healthy double-digit revenue growth rate over the next couple of years as well. This is evident from the chart below.
MSFT Revenue Estimates for Current Fiscal Year data by YCharts.
It is also worth noting that Microsoft's revenue in fiscal 2021 stood at $168 billion. So, if the company hits $244 billion in revenue in fiscal 2024, its top line would have increased at a compound annual growth rate (CAGR) of 13% in the past three years. This means Microsoft's fiscal 2024 growth and the forecast growth rate for the next couple of years are going to be stronger.
That's not surprising considering that it has been benefiting from the growing deployment of AI in multiple applications, such as cloud computing, personal computers (PCs), and workplace productivity and collaboration software. For instance, the demand for cloud-based AI services is set to grow at almost 40% a year through 2030 and generate $647 billion in revenue.
Microsoft is already capitalizing on this trend as its revenue from the Intelligent Cloud segment increased 21% year over year in fiscal Q3 to $26.7 billion. More specifically, the Azure cloud-computing service registered 31% growth from the prior-year period, and seven percentage points of that growth was driven by AI-related services.
That's not surprising as Microsoft is witnessing solid uptake for its cloud-based Azure OpenAI service. For instance, the company points out that "more than 65% of the Fortune 500 now use Azure OpenAI service," and more importantly, customers are spending more money on its AI-related cloud offerings. It saw an impressive 80% year-over-year jump in the number of Azure deals priced at more than $100 million.
This trend is likely to continue in the future thanks to the secular growth of the cloud AI market, as well as the fact that Microsoft is looking to push the envelope in this space by giving customers access to a larger portfolio of large language models (LLMs) and small language models (SLMs) by which they can develop custom AI applications.
Meanwhile, the demand for Microsoft's Copilot AI assistant is also increasing thanks to the growing adoption of AI-enabled workplace-productivity software. The tech giant points out that more than 60% of Fortune 500 companies are now using Copilot. Given that the workplace-collaboration market is forecast to double by 2027 and generate close to $72 billion in annual revenue, this presents yet another solid growth opportunity for Microsoft to tap.
A similar scenario is likely to unfold in the PC market as well, with an impressive 500 million AI-enabled laptops expected to be sold between 2023 and 2027, according to Counterpoint Research. This should drive an improvement in sales of Microsoft's Windows licenses over the next three years.
In all, there is a solid chance that Microsoft could sustain its mid-teens revenue growth beyond the next couple of years, as the chart earlier in the article demonstrated.
How much upside can the stock deliver?
The chart also showed that Microsoft's revenue could jump to $322.5 billion after a couple of fiscal years. Assuming the company's top line increases another 15% in fiscal 2027 (in line with the growth that it is expected to deliver for the next couple of years), its revenue could hit $371 billion after three years.
Microsoft has a five-year average price-to-sales multiple of 11. Assuming the company trades in line with the five-year multiple, which is a discount to its current-sales multiple of 14, its market cap could hit $4 trillion after three fiscal years. That would be a 15% jump from current levels. However, if Microsoft can deliver stronger growth thanks to AI and the market continues to reward it with a higher sales multiple, this tech stock could deliver stronger gains.
That's why investors who have been holding Microsoft stock in their portfolios would do well to keep holding this tech giant as it seems built for more upside thanks to a potential acceleration in growth.
