Few trends have had as much influence on the stock market over the last few years as artificial intelligence (AI). Fears of generative AI-powered solutions displacing established enterprise software providers have led to a massive sell-off in SaaS stocks. Meanwhile, investors fear the big capital expenditure budgets of the U.S. hyperscalers may be excessive and weigh on cash flow and earnings.
One company finds itself at the center of both fears: Microsoft (MSFT 0.99%). But the strength of both its software business and the positioning of its cloud business should give long-term investors confidence in the stock. In fact, it's practically a no-brainer buy at its current price of around $400 per share.
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The two-headed AI monster
Microsoft is benefiting from the growing demand for AI products and services in two ways.
First, its cloud computing platform, Azure, is seeing massive growth in its AI services. Its Foundry platform, which enables customers to build and deploy AI agents, saw 80% growth in customers spending $1 million per quarter in its second quarter. All told, Azure revenue grew 39% last quarter.
But that growth could have been even higher. Microsoft was forced to allocate some compute capacity it could've sold to developers for its own AI development and services. Indeed, demand for compute continues to outstrip Microsoft's ability to expand its capacity. Management spent $37.5 billion on capital expenditures last quarter, mostly on building data centers and outfitting them with servers. It expects a slight drop in spending this quarter due to timing, but that should ramp up again later in the year.
Microsoft has a lot of confidence in its spending plans, given its massive backlog of $625 billion in remaining performance obligations. $250 billion of that comes from a new deal inked with OpenAI last quarter, but RPO would've climbed 28% without the contract from the large language model developer. That figure also notably includes contracts for its Microsoft 365 and Dynamics 365 enterprise software suites.
NASDAQ: MSFT
Key Data Points
The commercial software business is also performing well. Microsoft 365 commercial revenue climbed 17% last quarter, and Dynamics 365 was up 19%. Microsoft is seeing excellent progress with its Copilot software attached to Microsoft 365, which it now says has 15 million users. The progress gave the company the confidence to launch a new product suite that includes Copilot and its forthcoming Agent 365 platform for deploying and managing AI agents across an organization. Microsoft counted over 400 million Microsoft 365 users as of its most recent update. So, there's a long runway for potential revenue growth by upselling them to its high-end AI-powered suite.
With the stock trading around $400, investors can buy shares for just 24 times forward earnings estimates. Considering its competitive positioning across both cloud computing and enterprise software, it appears set to grow revenue and earnings at a double-digit pace for the foreseeable future. As such, the current price makes the stock look like a no-brainer buy.
