Microsoft (MSFT -0.49%) was founded in 1975, and it has remained at the very top of the technology industry ever since. The company has amassed a $2.5 trillion market valuation which makes it the second-largest in the world behind its rival, Apple.
Despite its gigantic size, Microsoft continues to prove its ability to move nimbly. Over the years, it has dominated in software, gaming, and cloud computing. And now. it has snatched a leadership position in artificial intelligence (AI), which could be the company's largest financial opportunity ever as it plays out over the next decade (and beyond).
Microsoft just reported its financial results for the fiscal 2023 fourth quarter and full year. While growth was sluggish, given the tough economic environment, there were bright spots in its cloud segment, which is where it delivers exciting AI tools to businesses around the world. I'll explain why you'll wish you'd bought Microsoft stock when you look back on this moment a few years from now.
Image source: Getty Images.
It's all about artificial intelligence
In 2019, Microsoft invested $1 billion into AI start-up OpenAI, the developer of the now-popular online chatbot ChatGPT. When ChatGPT sparked widespread fascination with its ability to answer complex questions and even write computer code last year, Microsoft invested even more money, taking its total bet on OpenAI to $13 billion.
Microsoft has since focused on integrating OpenAI's technology into its product portfolio. ChatGPT now powers the Bing search engine, and it's also accessible through the Edge internet browser. Both instances are designed to steal market share from competitor Alphabet, which owns the dominant Google search engine and Chrome web browser.
In its fourth-quarter conference call, Microsoft said users have completed over 1 billion chats on Bing since its integration with ChatGPT earlier this year and generated 750 million images. The majority of that has been for personal use, but Microsoft also wants to go after the way people work. According to the company's Work Trend Index, 70% of employees want to delegate as much of their workload as possible to AI, and now they can, thanks to the recent launch of Bing Chat Enterprise and 365 Copilot.
Many workplaces have banned the use of AI chatbots for fear of their secret, valuable data flowing to tech giants like Microsoft. But Bing Chat Enterprise solves this problem because it comes with commercial data protection, which means not even Microsoft -- as the owner of the software -- can access it. That also means sensitive corporate data can't be used to train the Bing and ChatGPT models.
Microsoft 365 Copilot will be embedded in popular software like Word, Excel, and PowerPoint for $30 per user per month. It will allow users to harness the power of generative AI to create content like text and images to rapidly speed up their work.
But the cloud is where AI really comes to life
Microsoft generated $110 billion in cloud revenue during fiscal 2024, an increase of 27% year over year. CEO Satya Nadella told investors its flagship cloud services platform, Azure, accounted for more than half of that revenue for the first time. He also said customers are constantly asking the company how they can integrate AI into their businesses to address their biggest opportunities and their greatest challenges.
Microsoft now offers several AI models on Azure as a base for its business customers to build upon. Earlier this month, it announced Meta Platforms' LLaMA 2 open-source large language model would be available on Azure, which will help accelerate customers' AI ambitions. Plus, of course, OpenAI's latest GPT-4 technology is also available on Azure.
The Azure OpenAI Service had 11,000 customers at the close of fiscal 2023, up from just 2,500 three months prior. They include large corporations like Mercedes Benz, which is installing ChatGPT in 900,000 vehicles across the U.S. to supplement its in-car voice assistant.
AI presents a seismic financial opportunity for Microsoft
Microsoft's revenue growth came in at a sluggish 6.9% in fiscal 2023 due primarily to weakness in its consumer segments. With high inflation and rising interest rates, people are buying fewer computers, and Microsoft's Windows OEM revenue saw a decline during every single quarter of fiscal 2023. Devices revenue was also down heavily for most of the year, and gaming was basically flat.
But investors should consider Microsoft's potential over the next few years thanks to AI. Bing has a tiny 2.8% market share in the internet search industry right now, but the company estimates it will gain an additional $2 billion in revenue each year for every percentage-point increase in that share. With integrations across its web browser and software suite 365, Bing could siphon a substantial amount of traffic away from Google, which currently has a 92.6% market share in search.
But Azure presents the greatest opportunity because estimates for the potential value of AI software are mind-boggling, even at the low end. Consulting firm McKinsey & Company believes the technology will add $13 trillion to global economic output by 2030, and companies that adopt it today could see a 122% boost to their free cash flow by that time.
Cathie Wood's Ark Investment Management, on the other hand, predicts a $200 trillion boost to economic output by the end of this decade, creating a $14 trillion revenue opportunity for AI software providers like OpenAI. As a result, businesses will likely clamor to access the power of AI in the coming years, and Microsoft has positioned itself as a key distributor of the most advanced platforms via the cloud.
Microsoft stock currently trades at a price-to-earnings (P/E) ratio of 34. While that's a small premium to its peers in the tech sector, represented by the 33 P/E of the Nasdaq-100 index, I would argue none of them are positioned as well as Microsoft for the coming AI revolution.
For that reason, I think Microsoft stock will trade much higher over the next few years, and investors who miss the opportunity to buy it now will regret it when they look back on this moment.
