Going All In on AI

• • • Revenue: $62 billion (+18% YoY)
    • Income: $22 billion (+33% YoY)

• • • Revenue: $56 billion (+13% YoY)
    • Income: $22 billion (+27% YoY)

• • Revenue: $56 billion (+8% YoY)
  • Income: $20 billion (+20% YoY)

Not bad growth at all for a company that’s worth nearly three trillion dollars. Microsoft has still bee growing revenue by double digits fairly consistently. If anything, I expect that this growth will increase in the coming years thanks to AI.

Microsoft’s Most Recent Earnings Event

Microsoft reported its latest earnings announcement on January 30th, 2024. I dug through the transcript for you and wanted to highlight a few takeaways:

• Deploying AI at scale: Microsoft has officially transitioned from “talking about AI” to “deploying AI at scale.” “GenAI” is no longer a buzzword that’s used on earnings calls. It’s real tech that Microsoft is deploying into almost all of its offerings.

• GitHub Fun Fact: Over half of the Fortune 500 now uses Microsoft’s Azure OpenAI.

• GitHub Performance: Revenue accelerated to over 40% year-over-year, driven by all-up platform growth and adoption of GitHub Copilot (GitHub Copilot now has over 1.3 million paid GitHub Copilot subscribers, up 30% quarter-over-quarter.)

• Office 365 Users: Microsoft now has more than 400 million paid Office 365 seats

The main takeaway of the earnings report is almost all business lines were up and to the right last quarter. Also, Microsoft is deploying AI across all of its business lines. Microsoft owns a ton of business lines, including:

• Microsoft Office Suite
• Azure Cloud
• Activision Blizzard
• GitHub
• Xbox
• LinkedIn

Microsoft is clearly going all in on AI – which will determine the success of its stock price over the coming months and years.

Also, this wasn’t on the earnings call but Microsoft’s gaming revenue recently overtook Windows, thanks to its acquisition of Activision Blizzard. This gaming revenue will likely be another growth driver for Microsoft over the coming years It’s another reason this Microsoft stock forecast is going to be bullish.

Microsoft’s OpenAI Investment

Microsoft was an early winner in the AI race, thanks to its $10 billion investment in OpenAI – the owner of ChatGPT. OpenAI has been on fire in 2023 and 2024 and recently reached an $80 billion valuation. After releasing ChatGPT, the buzzy tech startup has continued to impress investors with new AI tools. Most recently, it launched Sora – a new text-to-video AI tool that feels like it’s out of a sci-fi movie. Using AI, Sora can take a few sentences of text and create a very impressive short video.

Microsoft owns 49% of OpenAI. But, the real value of Microsoft’s relationship with OpenAI can’t be summed up in a numerical figure (OK, technically speaking, you can and it’s $40 billion. But, I’m speaking figuratively). The real value of Microsoft’s relationship with OpenAI is its access to OpenAI’s large language models, data scientists, engineers, and ideas. This relationship is what could help Microsoft emerge as the true AI leader over the coming years, instead of Apple (Nasdaq: APPL), Google (Nasdaq: GOOGL), or Amazon (Nasdaq: AMZN).

In addition to its strategic partnership with the leading AI company, Microsoft is also working on an internal AI chip. This chip could help reduce Microsoft’s reliance on Nvidia (Nasdaq: $NVDA) and help improve the company’s profits over time.

Is Microsoft Overvalued?

If you’ve been involved in the stock market over the last year then you know that “AI” has turned into a huge buzzword. Every tech earnings call is essentially just “AI this” and “AI that.” So, this begs the question: are we in an AI bubble? If we are, Microsoft could be drastically overvalued.

Here’s the thing: I won’t say that we aren’t in a bubble. AI stocks have seen astounding runs over the past few months. But, the phrase “bubble” typically implies that valuations are not backed by anything legitimate. For example, NFTs were a bubble. So was the metaverse. These were really just abstract technology ideas. While the tech might have been feasible, there wasn’t really a market need for them. Nobody was lining up to visit “the metaverse.” But, AI is totally different.

AI has hundreds, if not thousands, of real-world use cases and tools like ChatGPT have already become staples. If anything, it’s difficult to even comprehend the scope at which AI will change the world. But, that said, I wouldn’t be surprised if there was a bit of a pullback with AI stocks over the short term – similar the the Dot Com crash.

In the 2000s, the internet companies that survived the Dot Co crash went on to dominate the 2000s and 2010s. A similar scenario could play out with artificial intelligence where legitimate companies get overhyped. But, over the long term, the sector will create unprecedented growth.

TLDR: Long Microsoft, but use a dollar-cost average strategy in the short-term.

I hope that you’ve found this Microsoft stock forecast valuable in learning whether or not Microsoft still has room for growth. If you’re interested in reading more, be sure to subscribe below to get alerted of new articles.

Disclaimer: This article is for general informational and educational purposes only. It should not be construed as financial advice as the author, Ted Stavetski, is not a financial advisor.