Microsoft (MSFT 0.48%) has sold off heavily over the past few weeks. It's now down nearly 30% from its all-time high, which is a rare sell-off for one of the world's largest and most important tech companies. I believe right now is a rare buying opportunity, and investors should scoop up shares while the stock is cheap.
The stock price will be far higher in three years than it is today, and the price that it ends up at makes it a no-brainer buy.
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Microsoft is excelling in its chosen AI path
Right now, AI sentiment is driving a lot of the market's action. Investors are worried about what the return on investment will be for all of the generative AI spending going on, and many of the AI hyperscalers are being hammered as a result. Microsoft is no exception, with it being down around 30% from its all-time high.
However, some AI stocks were starting to obtain absurd premiums despite mediocre growth, so was this Microsoft sell-off warranted? From a price-to-earnings standpoint, Microsoft now trades at the lowest level since the depths of the 2023 sell-off.
MSFT PE Ratio data by YCharts
That's a notable point, as market sentiment was more negative during that period than it is right now. Since 2020, Microsoft's average P/E multiple was 33, and I'll use that as the same valuation I'd expect it to return to after the stock has recovered. Now that we've set out our end valuation level, let's look at how quickly Microsoft is expected to grow over the next three years.
Azure is powering Microsoft's growth
Microsoft is approaching the AI arms race differently than some of its peers. Instead of developing a generative AI model in-house, it's becoming a location where developers can access multiple generative AI models and choose the one that suits their purpose best. This neutral stance allows it to capitalize on the general rise of AI computing, rather than needing to go all-in on an internal model.
Still, Microsoft has a vested interest in OpenAI succeeding, as it owns a 27% stake in it. This investment is a true wild card, as Microsoft could be sitting on a massive gain if OpenAI goes public at around a $1 trillion valuation. I'll mostly ignore this in my valuation, as it's impossible to predict what OpenAI will be worth over the next few years.
NASDAQ: MSFT
Key Data Points
The biggest contributor to Microsoft's growth is Azure, its cloud computing wing. This division is the primary beneficiary of AI spending, as it's growing rapidly due to AI workloads coming online every day. Azure's revenue rose by 39% year over year in its last quarter -- a figure that could have been higher if management deployed some of its hardware that came online for external use rather than internal use. I doubt this division's growth will slow much over the next few years, as the demand is massive.
For its fiscal 2026 (ending June 30), Wall Street analysts expect Microsoft's revenue to grow at a 16% pace. In fiscal year 2027, they expect a 15% growth rate. While I won't be surprised if Microsoft exceeds these figures, I think they are strong base projections. For fiscal year 2027, they also expect earnings per share (EPS) of $19.02 on average. That's only year one and a half of the projection, so we still need to apply growth on top of that. If Microsoft sustains its 15% growth rate, then its expected EPS in three years will be $23.45.
If Microsoft returns to its 33 times earnings premium, that would value the stock at $774 per share. Currently, it trades at about $390, so this would essentially indicate that Microsoft's stock could double in three years. Most stocks double in seven years, not three, making Microsoft a fantastic buy right now.
