Microsoft (NASDAQ: MSFT) hitting a new all-time high on Tuesday, along with a broader market rally. A few days earlier, at an event at the new Microsoft campus on May 20, the tech giant introduced a line of Windows personal computers (PCs) designed for artificial intelligence (AI).
The product offering, called Copilot + PC, includes Microsoft Surface and manufacturing partners Acer, ASUS, Dell Technologies, PK, LenovoAnd Samsung with prices starting at $999 and availability starting June 18.
Here’s what Copilot + PC adds to Microsoft’s already strong investment thesis and why the growth stock has what it takes to reach a $10 trillion market cap by 2035.
The next step for everyday AI
During its Q3 2024 earnings call, Microsoft said Copilot in Windows is now available on nearly 225 million Windows 10 and Windows 11 PCs – double the previous quarter. Copilot is Microsoft’s AI-powered chatbot assistant for Microsoft 365 apps and more. According to the May 20 press release:
Copilot+ PCs are the fastest and most intelligent Windows PCs ever built. With powerful new silicon capable of an incredible 40+ With TOPS (trillion operations per second), all-day battery life, and access to the most advanced AI models, Copilot+ PCs let you do things no other PC can do. Easily find and remember what you’ve seen on your PC with Recall, generate and refine AI images in near real-time directly on the device using Cocreator, and bridge language barriers with Live Captions, bringing audio from over 40 languages to English translated.
Building PCs with AI in mind is a boon for the industry because it supports demand for AI-powered chips, can increase user productivity, and create opportunities for developers and consumer electronics companies. In its recent earnings call, Microsoft said it offers a diverse range of AI accelerators created by Nvidia, Advanced micro devicesand its own ‘first-party silicon’.
A big test for the AI growth story is adoption. As consumers embrace these latest AI-focused products, it will confirm that AI is not a fad, but the next information revolution.
The ultimate AI game
Microsoft may not be the purest AI play out there (Nvidia would take the title in my opinion). However, Microsoft may be the most layered AI opportunity because it monetizes new technology in so many ways.
Beyond the PC market, Microsoft has integrated AI into its Intelligent Cloud business through Azure OpenAI, which is used by more than 65% of Fortune 500 companies.
GitHub Copilot continues to grow at a rapid pace. Two quarters ago, in the second quarter of fiscal 2024, Microsoft reported a 30% quarter-over-quarter increase in subscribers, bringing its total number of paid subscribers to 1.3 million. Yet somehow it posted even faster growth in the third quarter, boosting its paid subscriber base to 1.8 million – a 35% increase.
Microsoft also offers custom AI assistance with Copilot Studio. It reported a 175% quarter-over-quarter increase in Copilot Studio adoption, bringing the total number of organizations using the service to more than 30,000. Power Platform is a similar tool that allows companies to build AI-powered applications. Last quarter, Microsoft said more than 330,000 organizations, including more than half of the Fortune 100 companies, use Power Platform. Power Apps, which uses Copilot to help users write code for app designs, grew more than 40% year over year to more than 25 million monthly active users.
The biggest takeaway from the last few earnings calls is that Microsoft is rapidly monetizing AI across its business. This is not a pipe dream idea; it currently develops, implements and commercializes solutions.
The power of deep pockets
In cloud computing, enterprise and consumer software and hardware, gaming, social media and more, Microsoft has a wide range of touchpoints to connect with a variety of customers. In addition to its industry leading position in many end markets, the company’s biggest advantage is its margin of error.
AI and the technology sector in general will eventually experience a cyclical downturn. When that happens, the companies with the cash flow and balance sheets to invest throughout the cycle will emerge stronger. No company is better positioned to weather a recession and likely benefit from it than Microsoft.
It ended last quarter with just over $80 billion in cash, cash equivalents and short-term investments on its balance sheet, compared to $42.7 billion in long-term debt.
Revenue, net income and operating margin are all at their highest levels in ten years. It has generated $86.2 billion in trailing-twelve-month (TTM) net income, which is more than double the $21.3 billion it spent on dividends and the $16.8 billion spent on buybacks. The company has the resources to aggressively invest in organic growth, make strategic acquisitions, increase dividends and repurchase stock.
Microsoft pays more dividends than any other US-based company and spends more on buybacks than on stock-based compensation. The company is now reducing the number of shares outstanding, reversing the dilution trend due to stock-based compensation. Microsoft is at the top of its game. But it also has what it takes to weather a downturn while rewarding shareholders through buybacks and dividends and investing in its long-term growth.
The road to $10 trillion
In August 2018, Apple became the first US-based company to surpass $1 trillion in market capitalization – a feat that once seemed impossible. However, Nvidia has gained over $1 trillion in market cap this year alone.
With a market capitalization of $3.2 trillion, Microsoft is currently the most valuable company in the world. The stock is up more than 1,100% in the past 11 years. Thanks to the power of compound growth, it won’t take anything close to that gain to reach a $10 trillion market cap by 2035.
Microsoft’s market cap only needs to grow at a compound annual growth rate of 10.9% over the next eleven years to reach a market cap of $10 trillion. There are a few ways this can happen.
The first and simplest is earnings growth. If Microsoft maintains the same price-to-earnings (P/E) ratio, its stock price would hypothetically rise at the same rate as earnings.
Microsoft’s current price/earnings ratio is 37.2. If earnings rise by 10%, the stock will have to rise by 10%, otherwise the price/earnings would fall. Now I’d say Microsoft can grow earnings per share (EPS) at a CAGR of about 15% over the next eleven years, especially if we take buybacks into account. However, I would also see the valuation falling as growth and investor optimism start to cool.
Assuming a price-to-earnings ratio of 30 and an earnings CAGR of 15% over the next eleven years, Microsoft would grow earnings per share from $11.54 to $54. Apply a price/earnings of 30 and the stock price would be $1,620, giving Microsoft a market cap of just over $12 trillion.
So even if Microsoft’s price-to-earnings ratio falls, it could still reach $10 trillion by 2035 if annual earnings per share grow in the low-to-mid teens. For context, Microsoft’s TTM EPS is up 19.2% over the past year.
Microsoft is worth buying and holding
Microsoft is the best all-around AI play you can buy right now because it combines a proven track record, size and growth. AI drives margin expansion and drives Microsoft’s revenue growth. However, AI adoption is still in its early stages.
Investors should pay close attention to Microsoft’s continued growth in its cloud business and how consumers and businesses receive the new AI-powered Copilot+ PCs. If adoption is strong, Microsoft could grow even faster than expected.
Add it all up and Microsoft is a medium-risk, high-reward opportunity, with the best chance of being the most valuable company in the world by 2035.
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Daniel Foelber holds positions in Advanced Micro Devices. The Motley Fool holds positions in and recommends Advanced Micro Devices, Apple, HP, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Could this ‘Magnificent Seven’ stock become the first $10 trillion company by 2035? was originally published by The Motley Fool
