Microsoft (MSFT 0.43%) had a market capitalization of $3.695 trillion as of Friday morning. That means its stock only needs to climb by another 8.3% for the company to become the founding member of the $4 trillion club, which I think is a very strong possibility by the end of 2025 (although Nvidia (NVDA 2.94%) with its $3.835 trillion market cap could get there first).
Artificial intelligence (AI) has been the primary driver of Microsoft's increasing value over the last couple of years. The company is approaching this lucrative opportunity from several different angles, and it has already become an industry leader in the software and cloud segments.
Image source: Getty Images.
Here's why AI could be Microsoft's ticket to a $4 trillion valuation this year.
Microsoft has a diverse AI product portfolio
Microsoft has invested around $14 billion in ChatGPT creator OpenAI since 2019, and it has combined the start-up's industry-leading AI models with its own to create the Copilot virtual assistant. Copilot is accessible for free in some of Microsoft's flagship software (like Windows, Edge, and Bing), but it's also available as a paid tool in several products, like the following:
- 365 (Word, Excel, PowerPoint): Enterprises can add Copilot for an additional monthly subscription fee to boost the productivity of their employees. In the fiscal 2025 third quarter (ended March 31), Microsoft said the number of organizations using Copilot for 365 tripled year over year to the hundreds of thousands.
- Copilot Studio: This platform allows enterprises to create custom AI agents and deploy them into the software applications they use each day to boost productivity, and it already has over 230,000 customers.
- Dragon Copilot: This is a solution for the healthcare industry, which can autonomously transcribe conversations between doctors and their patients, rapidly generate referral letters, and even summarize diagnosis evidence to help improve outcomes.
But Copilot isn't the only revenue-generating AI product in Microsoft's portfolio because the company operates one of the world's largest cloud computing platforms called Azure, which now offers a suite of AI products and services under the Azure AI banner.
Azure AI leases state-of-the-art data center infrastructure to businesses, which is fitted with the latest AI chips from suppliers like Nvidia. It also offers access to ready-made large language models (LLMs) from the likes of OpenAI, which developers can use to accelerate their AI software projects.
NASDAQ: MSFT
Key Data Points
AI is quickly becoming the driving force behind Azure
Azure is often the fastest-growing part of Microsoft's entire organization, but it might have lost that title recently if not for Azure AI. A little less than two years ago, Azure AI accounted for just five percentage points of Azure's quarterly revenue growth. In the recent fiscal 2025 third quarter, it represented 16 percentage points, meaning it accounted for almost half of Azure's overall growth.
The contribution from Azure AI is likely to increase further from here because Microsoft CFO Amy Hood says the segment has a staggering $315 billion order backlog from AI customers who are waiting for more data center capacity to come online. Microsoft is building more data centers as fast as it can, and it opened new ones in 10 different countries during the last quarter alone.
In fact, the company is on track to have spent over $80 billion building AI infrastructure during fiscal 2025, which ends on June 30. Management's guidance suggests that the figure is likely to grow in fiscal 2026, which isn't a surprise, given the size of the opportunity ahead.
Can Microsoft join the $4 trillion club in 2025?
Based on Microsoft's trailing 12-month earnings per share (EPS), its stock is trading at a price-to-earnings (P/E) ratio of 38.2. That's 14% higher than its five-year average of 33.4, which suggests investors are willing to pay a premium for the stock at the moment:
Data by YCharts.
Microsoft's fiscal year 2026 begins on July 1, and Wall Street's consensus estimate (provided by Yahoo! Finance) suggests the company could deliver $15.14 in EPS, which would represent growth of over 13%. That places its stock at a forward P/E ratio of 32.6.
That means Microsoft stock would have to climb by around 17% over the next 12 months in order to maintain its current P/E ratio of 38.2, which is a fair assumption given the strength of its AI business. If the company delivers strong earnings during the first two quarters of fiscal 2026 (which fall in calendar year 2025), then investors might start pricing in the full-year result early -- especially considering that the stock market is a forward-looking machine.
In other words, it's possible Microsoft stock will deliver the majority of that 17% in potential upside in the next six months or so. Remember, it only needs a gain of 8.3% for the company's valuation to hit $4 trillion, so it could certainly achieve the milestone before 2025 is over.
