Microsoft’s next chapter will revolve around AI.
The technology sector has been one of the strongest industries so far in 2024, helped in large part by surging demand for artificial intelligence (AI).
Unsurprisingly, it seems like every tech company is trying to brand itself as the AI opportunity right now, but one company is emerging as a legitimate pioneer in the AI marathon. Microsoft (MSFT 1.64%).
Let’s take a closer look at how Microsoft is making a big splash in AI and why now is a great time for long-term investors to accumulate shares.
How is Microsoft disrupting AI?
In November 2022, ChatGPT was introduced to the world and the tech industry witnessed a major change. It didn’t take long for ChatGPT to become massive. By January 2023, media reports were circulating that ChatGPT had over 100 million users on its platform.
Given its widespread popularity and the sophistication of its large-scale language modeling technology, it is no coincidence that Microsoft invested $10 billion in ChatGPT’s parent company, OpenAI, in January 2023.
Over the past year and a half, Microsoft has been integrating ChatGPT into their overall ecosystem, and while it is still early days, the early financial results since investing in ChatGPT have been very impressive.
Image source: Getty Images.
Are your investments paying off?
One of the biggest growth opportunities for AI in general is cloud computing. According to Statista, Microsoft currently owns 25% of the global cloud infrastructure market. AmazonIn April, Microsoft released its financial results for the third quarter of fiscal year 2024. For the period ending March 31, Microsoft generated $26.7 billion from its intelligent cloud division, up 21% from the previous year.
In the Intelligent Cloud segment, Microsoft’s Azure cloud services revenue grew 31% year over year. Azure’s growth rate is encouraging given the level of competition among cloud infrastructure providers. Moreover, after listening to management’s comments on the conference call, investors have reason to believe that even stronger growth is on the way.
One of the biggest new products Microsoft has released since integrating ChatGPT into its business is a virtual assistant called CoPilot, and executives say about 60% of Fortune 500 companies use CoPilot.
Premium rating that matches the price
The chart below shows that Microsoft’s current price-to-earnings (P/E) and price-to-free cash flow (P/FCF) levels are well above their averages over the past decade.
MSFT price-to-earnings data from YCharts
While these valuation levels may suggest that Microsoft stock is a bit overpriced, we encourage investors to look at the bigger picture.
In just under two years, Microsoft has rapidly implemented novel AI applications across its ecosystem, further accelerating its cloud business while also making deep inroads with the world’s largest enterprises with its new CoPilot Assistant.
Investors looking to invest in AI should consider a position in Microsoft, whose ecosystem spans a variety of end markets including cloud infrastructure, personal computing, workplace productivity, gaming, and social networking – all sectors that could be completely revolutionized by AI.
To me, AI represents an exciting new chapter in Microsoft’s evolution.
The broader secular tailwinds driving AI suggest that the technology is here to stay in some form, and given that Microsoft has held leadership positions in many areas of the technology sector for nearly 50 years, we are confident that our investment in ChatGPT will position us well in AI for many years to come.
“Microsoft is one of those rare companies where investors can hold onto their shares forever and benefit from the company’s unwavering commitment to innovation and growth. For these reasons, I believe investors are best off investing in Microsoft for the long term and holding onto their shares.”
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco has invested in Amazon and Microsoft. The Motley Fool has invested in and recommends both Amazon and Microsoft. The Motley Fool recommends long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
