Microsoft has entered a new phase of growth, fueled by aggressive AI investments.
Artificial Intelligence (AI) is the biggest barometer of the revolution. Microsoft (MSFT -0.18%). In January 2023, the Windows developer launched AImania after investing heavily in OpenAI.
OpenAI is the creator of ChatGPT, a popular large language model (LLM) capable of writing articles, generating software code, and even generating images based on text prompts.
Over the past year and a half, Microsoft has integrated ChatGPT functionality into its ecosystem — from workplace productivity tools, social media platforms, and cloud computing.
Microsoft recently reported earnings for its third quarter of fiscal 2024, ending March 31. There was a lot of optimism throughout the earnings report, and advances in AI were front and center.
Let's unpack Microsoft's results, and discover why this “Magnificent Seven” member is one of the best stocks ever.
Microsoft's business is firing on all cylinders.
Microsoft is a totalitarian. In addition to its core development engine in Azure cloud computing services, the company also works in gaming, social media, and personal computing.
In the three months ended March 31, Microsoft's revenue rose 17 percent year over year to $61.9 billion. As always, all eyes were on Azure — and it didn't disappoint. Revenue from Microsoft Cloud reached $35.1 billion, representing a 23% year-over-year increase. Within the cloud segment, server products and cloud services were the main sources of growth.
MSFT Revenue (Quarterly) data via YCharts
What makes Microsoft such a compelling business is that both revenue and profits are growing. By expanding its margins, Microsoft has impressive financial flexibility. At the end of the quarter, the company held $80 billion in cash and equivalents on the balance sheet.
Microsoft is aggressively reinvesting its excess profits, and the company's latest creative AI application is already showing some encouraging signs.
Image source: Getty Images.
Copilot is a hidden gem
During the earnings call, Microsoft CEO Satya Nadella proudly told investors that “Microsoft Copilot and Copilot Stack … are orchestrating a new era of AI transformation.”
Microsoft Copilot is a smart assistant that is becoming increasingly integrated throughout the Microsoft ecosystem. The basic idea is that in almost every service Microsoft offers, more and more AI-powered features are becoming available. It's driving a new wave of productivity for Microsoft customers across multiple use cases and market sectors.
In fact, Microsoft has 30,000 Copilot users as of March 31 — a 175% quarter-over-quarter increase. Microsoft Copilot has reached nearly 60 percent of the Fortune 500 and boasts users such as Nvidia, Novo NordiskAnd Imjan.
A premium assessment worth the price
Microsoft currently trades at a forward price-to-earnings (P/E) ratio of 35.6. That's above many of its mega-cap tech peers, and by a lot more. S&P 500Forward P/E of 20.7.
MSFT Total Return Price data via YCharts
The chart should shed some light on why Microsoft stock trades at a premium. The analysis underlines Microsoft's total return over a long-term horizon against both megacap AI stocks and other big technology behemoths that were once considered cutting-edge technology businesses.
Microsoft is the best performing stock in this peer group. Moreover, given the momentum the company is witnessing thanks to its AI ambitions, I think even more benefits are on the horizon.
I think acquiring Microsoft shares now will be a good decision in the long run. The company has a proven history of generous shareholder returns, and has outperformed its competition by huge margins.
In a way, Microsoft echoes the characteristics of a blue-chip business, given its consistent revenue growth and strong cash flow. And yet at the same time, the company is still very much in growth mode.
The combination of reliable top and bottom line growth, complemented by a new wave of growth characterized by AI, is an extremely rare combination. In my opinion, Microsoft has earned its premium valuation and is a stock that investors can hold forever.
Suzanne Frey, an Alphabet executive, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, is a member of the board of directors of The Motley Fool, an Amazon subsidiary. Adam Spotako holds positions at Alphabet, Amazon, Apple, Microsoft, Novo Nordisk, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Cisco Systems, Microsoft, Nvidia and Oracle. The Motley Fool recommends Amgen, International Business Machines, and Novo Nordisk and 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.