One of the biggest metrics of the AI revolution is… Microsoft (NASDAQ:MSFT). The Windows developer has launched the AI craze after a major investment in… OpenAI In January 2023.
OpenAI is the maker of ChatGPT, a popular large language model (LLM) capable of writing articles, producing code, and even generating images based on text prompts.
Over the past year and a half, Microsoft has been integrating ChatGPT functionality across its ecosystem — from workplace productivity tools to social media platforms and cloud computing.
Microsoft recently announced its earnings for the third quarter of fiscal year 2024, ending March 31. There was a lot of optimism throughout the earnings report, and advancements in artificial intelligence were front and center.
Let's unpack Microsoft's results, and explore why this member of the “Magnificent Seven” is a great stock to own forever.
Microsoft's business is firing on all cylinders
Microsoft is an absolute giant. In addition to its main growth driver in Azure cloud computing services, the company also operates across gaming, social media and personal computing.
For the three months ended March 31, Microsoft's revenue rose 17% year over year to $61.9 billion. As always, all eyes were on Azure, and it did not disappoint. Revenue from Microsoft Cloud was $35.1 billion, representing a 23% increase year over year. In the cloud segment, server products and cloud services were the main sources of growth.
What makes Microsoft such a compelling business is that Revenues and profits both rise. By expanding its margins, Microsoft enjoys impressive financial flexibility. At the end of the quarter, the company maintained $80 billion of cash and cash equivalents on the balance sheet.
Microsoft has been aggressively reinvesting its excess profits, and the company's latest AI application has already shown some encouraging signs.
Copilot is a hidden gem
During the earnings call, Microsoft CEO Satya Nadella proudly told investors that “Microsoft Copilot and the Copilot Stack… are orchestrating a new era of AI transformation.”
Microsoft Copilot is an intelligent assistant that has become increasingly integrated into the Microsoft ecosystem. The basic idea is that in almost every service Microsoft offers, more and more AI-powered features are becoming available. This is driving a new wave of productivity across a number of use cases and market segments for Microsoft users.
In fact, Microsoft had 30,000 Copilot users as of March 31 — a 175% increase quarter-over-quarter. Microsoft Copilot has penetrated nearly 60% of the Fortune 500 and boasts customers such as Nvidia, Novo NordiskAnd Amgen.
Excellent rating well worth the price
Microsoft is currently trading at a forward price to earnings (P/E) of 35.6. This is higher than many of its big tech peers, and is significantly higher than Standard & Poor's 500Forward P/E of 20.7.
The chart should shed some light on why Microsoft stock is trading at a higher price. The analysis shows Microsoft's long-term total return versus a group of massive AI stocks and other big tech giants that were once considered some of the most innovative tech companies.
Microsoft is the best-performing stock in this peer group. Furthermore, given the company's momentum with its AI ambitions, I believe more gains are on the horizon.
I think buying Microsoft stock now would be a good decision in the long term. The company has a history of generous returns to shareholders, and has outperformed its competitors by a significant margin.
In a way, Microsoft reflects the characteristics of a leading company, given its steady revenue growth and strong cash flow. However, at the same time, the company is still very much in growth mode.
The combination of reliable growth in bottom line and income, complemented by a new wave of growth characterized by artificial intelligence, is an extremely rare combination. In my opinion, Microsoft has earned its premium valuation and is a stock that investors can hold forever.
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Susan Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Spatacco He has 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 $395 January 2026 calls on Microsoft and short $405 January 2026 calls on Microsoft. The Motley Fool has Disclosure policy.
A once-in-a-generation investment opportunity: Here's one artificial intelligence (AI) stock you can buy in May and hold forever Originally published by The Motley Fool