Microsoft (NASDAQ: MSFT) is now the most valuable company in the world, with a market capitalization of just over $3 trillion. The proliferation of artificial intelligence (AI) has played a central role in helping the tech giant reach this position.
Microsoft shares are up more than 72% since early 2023, as the AI revolution took hold. The stock’s performance was in line with that of the Technology sector Nasdaq-100 indexing during this period. Microsoft’s impressive rally seems well-deserved considering the company has quickly cashed in on its partnership with OpenAI and offers a wide range of AI-focused solutions across its software portfolio.
AI has already started moving the needle for Microsoft, with the company witnessing growth in lucrative markets such as cloud computing. Looking ahead, Microsoft could remain a solid AI player thanks to the adoption of the technology in the workplace collaboration, cloud, gaming and personal computer (PC) markets.
However, Microsoft itself expects that AI will only make a gradual contribution to growth. Meanwhile, analysts at investment banking firm Evercore predict that AI could add $100 billion to Microsoft’s annual revenue by 2027. The company’s trailing-twelve-month revenue of $575 billion suggests AI could boost Microsoft’s revenue by 17% over the next three years. based on Evercore’s estimate.
This probably explains why analysts expect Microsoft’s profits to grow 16% per year over the next five years. While that’s a decent growth rate, there are other AI stocks that are expected to experience much faster growth over the next five years, and they could become even more valuable than Microsoft.
In this article we will look at such a name.
Amazon could be a big winner of the AI revolution
Amazon (NASDAQ: AMZN) is the sixth largest company in the world, with a market capitalization of $1.9 trillion. Like Microsoft, the e-commerce and cloud computing giant has aggressively incorporated AI elements into its various offerings.
For example, the company is strengthening its cloud computing business – Amazon Web Services (AWS) – by offering customers “the most comprehensive collection of compute instances.” AWS customers can’t only get access to chips from the chip giant Nvidia to train and deploy AI models on its cloud computing platform, but they can also access Amazon’s internal chips for their AI needs if they’re looking for performance on a budget.
Amazon management pointed out during the company’s earnings conference call in February that “several customers [use] our AI chips, including Anthropic, Airbnb, Hugging Face, Qualtrics, Rico and Snap.” That’s not surprising, since different companies have different needs when it comes to developing AI applications, and not everyone has the power of an expensive Nvidia graphics card.
Amazon has recognized this and wants to capitalize on its position as a leading cloud computing provider to capture more AI-related business. AWS controlled 31% of the cloud infrastructure market at the end of last year. Integrating AI tools into its platform is a smart move by Amazon as demand for AI services in the cloud could grow 36% annually through 2032, generating $887 billion in annual revenue by the end of the forecast period can generate.
The good news for Amazon investors is that the cloud isn’t the only area where the company is using AI to fuel its long-term growth. It has also introduced e-commerce-focused AI tools. Amazon has harnessed the power of generative AI to help sellers create product pages on its e-commerce platform with just a link to their websites. Sellers don’t have to go through a lengthy and tedious process of manually filling out product pages.
Therefore, it is not surprising to see that more than 100,000 of the company’s sales partners have already used this tool, which simplifies the process of creating listings on the platform. The ease of creating product pages could help Amazon attract more sellers and capture a larger share of the e-commerce market in the future.
At the same time, Amazon has rolled out a generative AI-powered assistant known as Rufus to help improve product discovery for customers shopping on its platform. Amazon trained Rufus using its “extensive product catalog, customer reviews, community questions and answers, and information from around the web.” As a result, the company could drive more customer spending on its platform by using AI to recommend the right products.
All in all, it’s easy to see why analysts expect Amazon to deliver healthy annual earnings growth of 30% over the next five years. But will this be enough to make it bigger than Microsoft in five years?
Can Amazon overtake Microsoft?
Amazon ended 2023 with earnings of $2.90 per share. If profits indeed grow 30% per year over the next five years, Amazon’s operating income could rise to $10.77 per share. The stock currently trades at 44 times forward earnings. This corresponds with the profit figures of the American technology sector. Considering that Amazon’s earnings growth is expected to accelerate over the next five years compared to the 10% growth it achieved over the past five years, the market could reward the company with a richer multiple.
But even if Amazon maintains its five-year forward earnings numbers, its stock price could rise to $474. That would be a 158% jump from current levels, suggesting that Amazon’s market cap could rise to $4.9 trillion after five years.
Microsoft’s expected 16% earnings growth could push operating income to $20.60 in five years (based on fiscal 2023 earnings of $9.81 per share). Microsoft currently trades at 31 times forward earnings, which is a slight premium to its five-year average price-to-earnings (P/E) ratio of 29.
Given that Microsoft is expected to deliver slower earnings growth than Amazon, we assume it will trade at a discount to Amazon and maintain a five-year price-to-earnings ratio of 29, based on the five-year average. So Microsoft stock could rise to $597 after five years. That would represent a 43% jump from current levels, suggesting the market cap could rise to $4.4 trillion after five years.
As such, the possibility of Amazon becoming a bigger company than Microsoft in five years cannot be ruled out. Therefore, investors looking to buy an AI stock that can deliver healthy long-term profits should keep it on their radar.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends 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.
Prediction: This Artificial Intelligence (AI) Stock Could Be Worth More Than Microsoft in Five Years Originally published by The Motley Fool
