One of the biggest barometers of the artificial intelligence (AI) revolution is Microsoft (NASDAQ: MSFT). The Windows developer started the AI mania after making a significant investment in OpenAI in January 2023.
OpenAI is the creator of ChatGPT, a popular large language model (LLM) that can write essays, produce software code, and even generate images from text prompts.
Over the past year and a half, Microsoft has been integrating ChatGPT’s functionality across its entire ecosystem: from workplace productivity tools, social media platforms, and cloud computing.
Microsoft recently reported earnings for the third quarter of its 2024 fiscal year ending March 31. There was a lot of optimism spread throughout the earnings report, and advances in AI took center stage.
Let’s unpack Microsoft’s results and explore why this “Magnificent Seven” member is a great stock to own forever.
Microsoft’s operations are firing on all cylinders
Microsoft is an absolute behemoth. In addition to its main growth driver in Azure cloud computing services, the company is also active in gaming, social media and personal computing.
For the three months ended March 31, Microsoft’s revenue grew 17% year over year to $61.9 billion. As always, all eyes were on Azure, and it did not disappoint. Microsoft Cloud revenue was $35.1 billion, up 23% year over year. Within the cloud segment, server products and cloud services were the main sources of growth.
What makes Microsoft such an attractive company is that both sales and profits are soaring. By expanding its margins, Microsoft has impressive financial flexibility. At the end of the quarter, the company had $80 billion in cash and equivalents on its balance sheet.
Microsoft is aggressively reinvesting its excess profits, and the company’s latest generative AI application is already showing some encouraging signs.
Copilot is a hidden gem
During the earnings call, Microsoft CEO Satya Nadella proudly told investors that “Microsoft Copilot and Copilot stack… are orchestrating a new era of AI transformation.”
Microsoft Copilot is a smart assistant that is increasingly integrated into the Microsoft ecosystem. The underlying idea is that more and more AI-powered features are becoming available in virtually every service Microsoft offers. This is driving a new wave of productivity across a number of use cases and market sectors for Microsoft users.
In fact, as of March 31, Microsoft has 30,000 Copilot users – a 175% increase quarter-over-quarter. Microsoft Copilot has penetrated about 60% of the Fortune 500 and has customers like Nvidia, Novo NordiskAnd Amgen.
A premium rating that is well worth the price
Microsoft currently trades at a price-to-earnings (P/E) ratio of 35.6. This is above many of its mega-cap tech peers, and is much higher than the S&P500‘s forward price-earnings ratio of 20.7.
The chart should shed some light on why Microsoft stock is trading at a premium. The analysis illustrates Microsoft’s total returns over a long-term horizon against a cohort of both mega-cap AI stocks and other major tech giants that were once considered some of the most innovative tech companies.
Microsoft is the best performing stock in this reference group. Furthermore, given the momentum the company is experiencing due to its AI ambitions, I think more gains are in store.
I think picking up shares of Microsoft will be a good decision in the long run. The company has a proven history of generous shareholder returns and has far outperformed its competitors.
In some ways, Microsoft reflects the characteristics of a blue chip company, given its steady revenue growth and robust cash flow. And yet at the same time, the company is still in strong growth mode.
The combination of reliable sales and profit growth, supplemented by a new wave of growth with AI, is an extremely rare combination. In my opinion, Microsoft has earned its premium valuation and is a stock that investors can hold on to forever.
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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. Adam Spatacco holds positions at Alphabet, Amazon, Apple, Microsoft, Novo Nordisk and Nvidia. The Motley Fool holds 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 January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
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