Microsoft (NASDAQ: MSFT) was founded in 1975, and some of its earliest software products like Windows and Word are still used by over 1 billion people today. But the company has since expanded into other businesses like gaming, internet search, cloud computing, and now artificial intelligence (AI).
AI is a major new focus for Microsoft. The company is quickly building new data centers to meet the demand for computing power from AI developers, and it has already launched AI software products like the Copilot virtual assistant, which could be a significant source of revenue in the coming years.
According to AI industry insiders and tech experts, those initiatives could drive explosive growth for Microsoft in the coming years. As a result, I predict it will be one of the first AI companies in the world to surpass a valuation of $5 trillion, which represents an upside of 70% from its current market cap of $2.94 trillion. Here’s why.
Microsoft is taking a multifaceted approach to AI
Last year, Microsoft agreed to invest an additional $10 billion in ChatGPT creator OpenAI, and it used the start-up’s industry-leading AI models — in combination with its own models — to develop Copilot. The virtual assistant is now integrated into most of Microsoft’s flagship software products including the Windows operating system, the Bing search engine, the Edge internet browser, and the 365 suite of productivity applications.
Copilot for 365 allows the user to instantly create content in Word, whether it’s an article or a business proposal, and the virtual assistant can even use past content pieces as a guide for formatting purposes. Then, that Word document can be transformed into a PowerPoint presentation with a single prompt. It’s the ultimate productivity tool, which is why organizations are signing up in droves.
During the fiscal 2024 fourth quarter (ended June 30), Microsoft saw a 60% increase in the number of Copilot for 365 customers from just three months earlier. The number of businesses that purchased at least 10,000 Copilot seats for their employees more than doubled, and they included giants like Walt Disney and Novartis. Consulting firm EY is deploying Copilot to a whopping 150,000 of its employees.
Copilot costs an additional $30 per seat, per month, on top of the cost of a 365 subscription (though it’s likely discounted for large enterprises), so Microsoft has an opportunity to create a significant amount of new revenue from its existing customers.
However one of Microsoft’s biggest AI opportunities rests in the cloud, primarily through its Azure platform. Microsoft is building data centers fitted with the latest chips from suppliers like Nvidia and Advanced Micro Devices, and it distributes that computing capacity to businesses through Azure, which they use to develop AI applications. Plus, businesses can access ready-made AI models on Azure to accelerate their progress, including those from OpenAI.
Azure AI had over 60,000 customers at the end of Q4, which was a 60% increase from the year-ago period.
AI is contributing to Microsoft’s revenue already
Microsoft generated $64.7 billion in total revenue during Q4, which represented 15% growth year over year. Beneath the surface, its intelligent cloud segment accounted for $28.4 billion of that revenue, which was an increase of almost 19%. Drilling down even further, revenue attributed to Azure, specifically, soared 29% — and 8 percentage points of that growth was from AI.
Microsoft CFO Amy Hood said demand was higher than capacity during the quarter, which means Azure revenue could have grown even faster if the company had more AI data centers online. That’s why it spent an eye-watering $19 billion on capital expenditures during Q4 alone, nearly all of which went toward building AI data center infrastructure and buying servers and chips.
Microsoft believes it will monetize that capex over the next 15 years, so it clearly views AI as a long-term opportunity.
Beyond Azure, 365 commercial revenue grew by 13% year over year during Q4, and Microsoft said Copilot drove an increase in average revenue per user as adoption grew in the enterprise. CEO Satya Nadella said Copilot is growing faster than any generation of software the company has launched within 365 to date. That momentum is expected to continue in fiscal 2025.
Microsoft’s path to a $5 trillion valuation
According to Nvidia CEO Jensen Huang, data center operators can generate $5 in revenue for every $1 they spend on chips, by renting the computing power and providing AI services in the cloud (over four years). Ark Investment Management CEO Cathie Wood believes AI software will generate $8 in revenue for every $1 invested in chips.
If those forecasts are accurate, Microsoft could yield well over $100 billion in additional revenue over the long term from its $19 billion in Q4 capex — and the company intends to spend even more than that in upcoming quarters. That kind of payoff alone will almost certainly catapult Microsoft to a $5 trillion valuation.
But let’s take a look at the numbers in the here and now. Microsoft generated $11.80 in earnings per share during fiscal 2024, which was a 22% increase from fiscal 2023. Based on its current stock price of around $417, Microsoft trades at a price-to-earnings (P/E) ratio of 35.3. If the company continues to grow its earnings by 22% per year and maintains its current P/E ratio, it will surpass a $5 trillion valuation within the next two and a half years!
With that said, 22% is a fast growth rate for a company of this size, and Wall Street is only forecasting 11.3% earnings growth in fiscal 2025, followed by 16.3% growth in fiscal 2026. Even at 11.3%, Microsoft will still reach a $5 trillion valuation within five years (assuming a constant P/E ratio).
I would bet on a moderately higher growth rate over the next few years, though, because Microsoft could fill a tsunami of pent-up demand as it gradually completes new data centers.
Nvidia and even Apple are similarly valued to Microsoft right now, and they also have a path to the $5 trillion milestone within a few years. But even if Microsoft doesn’t get there first, I don’t think it will be far behind whichever company does.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Microsoft, Nvidia, and Walt Disney. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Prediction: This Will Be One of the World’s First $5 Trillion Artificial Intelligence (AI) Stocks was originally published by The Motley Fool
Source: finance.yahoo.com