Artificial intelligence (AI) has caused a lot of buzz since the beginning of last year, and rightly so. Generative AI, which is the cutting edge of these next-generation algorithms, can create original content including text, video, and images with just a few simple instructions. Perhaps more importantly, these systems can be used to streamline many time-consuming tasks, increasing productivity. The ability to save time and money means many companies are eager to integrate AI into their operations.
One of the biggest winners of the AI revolution so far is Nvidia. The company’s graphics processing units (GPUs) are the gold standard when it comes to AI. However, with Nvidia gaining more than 800% since the start of last year, investors are working to uncover the next wave of stocks to benefit from rapid AI adoption. Many believe the next frontier will be software. According to Bloomberg Intelligence, sales of generative AI software could increase by as much as 18,647% to $280 billion by 2032.
Nvidia will likely continue to reap the benefits of the seeds it sowed more than a decade ago, but there’s another company that has positioned itself to benefit as the trend toward AI-enabled software gains momentum.
Microsoft: Reimagined for the 21st Century
Microsoft (NASDAQ: MSFT) made a name for itself thanks to its Windows personal computer (PC) operating system and Explorer web browser. The company has cemented its place in technology history with the release of its Office suite of workplace productivity software.
Over the past decade, however, Microsoft has transformed itself and expanded into a number of new markets with the creation of its Teams workplace collaboration software, acquisitions including Minecraft and Activision Blizzard, and the debut of its ‘Big Three’ cloud infrastructure platform. Azure cloud.
Microsoft was also among the first to recognize the transformative opportunities of generative AI. The investment and partnership with OpenAI, which began in 2019, gave Microsoft a keen insight into the future potential of AI, with these algorithms being worked on in relative obscurity until early last year.
The fruit of this early foray into AI is Microsoft Copilot, the tech giant’s line of AI-powered digital assistants. What started as a single tool to help developers write code has become the foundation of the company’s AI strategy.
The flagship version is Copilot for Microsoft 365, which is deeply embedded in Microsoft Office, the company’s collection of software-as-a-service (SaaS) offerings. In addition, Microsoft has developed a number of additional Copilots designed for specific professions, including sales, service and finance.
Copilot could be a digital gold mine for Microsoft. Most companies pay $30 per user per month for Copilot. For context, the company offers plans ranging from $12.50 to $57 per user per month for Microsoft 365, so the addition of Copilot could roughly double the cost of many plans.
Microsoft has been tight-lipped on the details so far, but several analysts have weighed in, suggesting that Copilot could generate annual revenues of more than $100 billion by 2027.
The company is also seeing a boost for its cloud infrastructure services thanks to AI. In the first quarter of the calendar, Microsoft’s Azure Cloud grew 31% year over year, surpassing both Amazon Web Services (AWS) and Alphabet‘s Google Cloud, which grew 17% and 28% respectively. Management also revealed that AI services “contributed seven points” to Azure’s growth.
Overall, Microsoft captured 25% of global cloud infrastructure spending this quarter, compared to Google Cloud at 10% and AWS at 31%. If the current trend continues, Microsoft could eventually become the leading provider of cloud services and dethrone AWS.
The proof is in the pudding
Microsoft continues to achieve remarkable results, especially for a company of its size. For the fiscal third quarter (ended March 31), revenue rose 17% year over year to $61.9 billion, while diluted earnings per share rose 20% to $2.94.
Despite the enormous opportunity ahead and Microsoft’s first mover advantage, the share price is worth 37 times forward earnings, which is surprisingly reasonable considering the enormous opportunity.
We’re barely a year into the AI revolution, yet the excitement about AI is palpable. Microsoft has developed a brilliant strategy to capitalize on the early stages of AI adoption, benefiting shareholders along the way. That’s why the stock is a buy.
Should You Invest $1,000 in Microsoft Now?
Before you buy shares in Microsoft, consider the following:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Microsoft wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $801,365!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns June 10, 2024
Suzanne Frey, a director 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. Danny Vena has positions at Alphabet, Amazon, Microsoft and Nvidia. The Motley Fool holds positions in and recommends Alphabet, Amazon, 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.
Sales of generative AI software could increase by 18,647% by 2032. 1 Unstoppable AI (Artificial Intelligence) Stocks We Should Buy Before They Do (Hint: Not Nvidia) was originally published by The Motley Fool
