Investing in Microsoft's AI Future

Microsoft is currently witnessing impressive growth in its array of artificial intelligence (AI) products and services.

Microsoft (MSFT 2.12%), along with Apple and Nvidia, stands out as one of the few companies globally valued at $3 trillion or more. While Nvidia leads the market in AI chip production, Microsoft is quickly establishing itself as a heavyweight in AI software.

Recently, Microsoft published its strong financial results for the first quarter of fiscal year 2025, which ended on September 30. The company reported significant growth thanks to its Copilot AI assistant and various AI-powered cloud services.

For anyone looking to invest, especially those with $420 to spare, purchasing one share of Microsoft and holding onto it until at least 2030 may prove to be a prudent decision.

The Copilot AI Assistant: A Growth Catalyst

At the start of 2023, Microsoft committed $10 billion to OpenAI, the company behind ChatGPT. This partnership allowed Microsoft to quickly develop its Copilot virtual assistant, capable of generating text, images, and computer code, and even responding to complex questions across different topics.

Copilot is available at no cost on many of Microsoft's core software products, including Windows, the Bing search engine, and the Edge browser. For users who subscribe to Microsoft 365, Copilot is available for a small additional monthly fee. Given that there are over 400 million paid 365 licenses globally, this could translate into a massive revenue stream for Microsoft.

As of the first quarter, Microsoft revealed that 70% of Fortune 500 companies are currently implementing Copilot in their 365 subscriptions. While the total user adoption rate remains undisclosed, CEO Satya Nadella mentioned that the daily usage of Copilot doubled in just three months.

One notable example is Vodafone, which decided to roll out Copilot across its workforce of more than 68,000 employees after a pilot program showed that it saved approximately three hours of work per employee each week.

Moreover, Microsoft's Copilot Studio platform is witnessing robust growth, allowing businesses to craft specialized Copilots for their specific needs. For instance, companies can develop one Copilot for Teams to assist with meeting management and another for generating insights in Excel.

At the close of the first quarter, more than 100,000 organizations had engaged with Copilot Studio, a number that has doubled within just three months.

Strong Performance of Azure Cloud Services

Microsoft's Azure cloud platform is often recognized as one of the fastest-growing sectors within the company. Azure offers a vast array of services designed to assist businesses in navigating the digital landscape, from basic data storage solutions to complex software development tools. Additionally, Azure includes Azure AI, which provides a suite of services designed to help organizations incorporate AI technology into their daily operations.

Azure AI allows developers to tap into cutting-edge computing capabilities powered by advanced chips from companies like Nvidia and Advanced Micro Devices. Azure also became the first cloud platform to deploy systems using Nvidia's latest graphics processing units (GPUs), known as GB200, which excel in AI inference tasks.

Microsoft states that the usage of its Azure OpenAI platform has also more than doubled in the last six months, as companies strive to create AI-driven digital assistants to enhance employee productivity.

Overall, during the third quarter, Azure reported a 33% revenue increase compared to the same time the previous year, of which 12% stemmed from AI services alone. This growth rate has steadily increased since Microsoft began tracking it over a year ago, indicating sustained demand for its data center infrastructure.

During the first quarter, Microsoft earmarked $20 billion for capital expenditures (capex), primarily focusing on bolstering AI data center infrastructure and chip technology. This follows an impressive $55.7 billion in capex spending for the entirety of fiscal 2024. Hence, it becomes crucial for the company to demonstrate a return on this substantial investment, and the continued acceleration in Azure AI growth provides hopeful signs.

Long-Term Investment Potential in AI

The AI sector is poised to be one of the most significant financial opportunities of the upcoming generation. Last year, Ark Investment Management projected that AI could contribute up to $200 trillion to the global economy by 2030, enhancing productivity for various knowledge workers. Cathie Wood, Ark's Chief Investment Officer, forecasts that AI software firms may generate up to $8 for every dollar spent on chip technology.

If these projections hold true, Microsoft's large-scale investments in AI infrastructure could yield hundreds of billions in returns. Multiple organizations share an optimistic outlook on the AI market:

• PwC estimates that AI has the potential to add $15.7 trillion to the global economy by 2030.
• McKinsey & Company projects that AI could generate an additional $13 trillion in economic activity by 2030.
• Goldman Sachs suggests that AI could create $7 trillion in economic impact over the next decade.

Why Now is the Time to Buy Microsoft Stock

Over the past four quarters, Microsoft has recorded earnings per share of $12.12. As of the latest data, with its stock trading at $412.05, it has a price-to-earnings (P/E) ratio of 33.9. This figure represents a modest premium compared to the Nasdaq-100 technology index, which has a P/E ratio of 32.3. However, it is among the lowest valuations Microsoft has experienced this year.

Given Microsoft's leading position in AI software, especially in terms of monetization, many believe it deserves a higher valuation than the broader tech market. For those who invest in Microsoft stock today, it could be seen as a significantly wise choice by the year 2030, particularly if AI growth forecasts materialize.

Disclaimer: The author holds no positions in any of the stocks mentioned. The entities referenced may have investments in or recommend Microsoft, among others.

Microsoft, Investment, AI