The AI Stock You Should Buy and Hold Forever

The growth narrative of tech titan Microsoft (MSFT) commenced long before artificial intelligence (AI) became a factor. With a robust product range, it has forged a highly successful enterprise, consistently expanding revenue and earnings over the past decade. Microsoft stock has delivered 973% over the previous decade. In 2023, the stock surged 56%, spurred by the AI frenzy and robust quarterly figures.

Its most recent Q2 of fiscal 2024 has emerged as an impressive anecdote. Microsoft pointed out in the Q2 earnings call that, besides its own research, independent studies have demonstrated that generative AI leads to a 70% enhancement in productivity – indicating that AI will have a crucial role in reshaping work going forward.

Given its AI-driven cloud prowess, Microsoft is likely to hit its high target price of $600 by the end of the year. With a valuation of $3 trillion, MSFT shares have ascended 9.3% year-to-date, outperforming the tech-heavy Nasdaq Composite’s ($NASX) gain of 5.8%.

The AI Stock You Should Buy and Hold Forever

Extraordinary Growth Driven by Microsoft’s Cloud Platform

Microsoft’s cloud computing platform, Azure, has been a catalyst for growth. Azure is ranked second in the cloud computing market, possessing a 22% share, trailing Amazon’s (AMZN)AWS (Amazon Web Services).

In the Q2 of fiscal 2024, the Intelligent Cloud segment raked in $25.9 million in revenue, an uptick of 20% year-over-year. The segment’s operating income also surged 40% to $3.6 billion. The segment accounted for 42% of Microsoft’s total revenue of $62 billion, which expanded 18% from the prior-year quarter, Adjusted earnings also soared 26% year-over-year to $21.9 billion. Both revenue and earnings outpaced the consensus estimate.

Notably, Azure and other cloud services revenue skyrocketed 30% year-over-year in the quarter. CEO Satya Nadella emphasized in the Q2 earnings call that Azure AI now boasts 53,000 customers.

Microsoft has now integrated AI into all of its products, including Windows, Office 365, and others, which has elevated each segment’s performance. While the personal computing market’s tepid recovery hindered the segment in earlier quarters, it surged 19% in the second quarter to $16.9 billion.

Additionally, in the Productivity and Business Processes segment, Microsoft Cloud offerings amplified the remaining performance obligation (RPO) of commercial businesses by 17%. RPO measures the upcoming revenue opportunity, which is the contract revenue that has yet to be recognized. The company anticipates 45% of RPO to be recognized as revenue over the next 12 months.

The AI Wave Will Continue to Illuminate MSFT’s Bright Future 

Moving forward, management anticipates Productivity and Business Processes segment revenue to grow by 10% to 12% in Q3, reaching $19.3 billion to $19.6 billion, owing to long-term Azure contracts and burgeoning renewals.

Similarly, the Intelligent Cloud segment could expand by 18% to 19%, fueled by Azure AI, while the Personal Computing segment’s revenue could increase by 11% to 14%. Microsoft concluded the quarter with a substantial cash, cash equivalents, and short-term investment balance of $81 billion, as well as $44.9 billion in long-term debt. Management aims to persist in scaling the company’s cloud operations and AI investments.

For the entire fiscal year, analysts forecast revenue and earnings to enhance by 15.2% and 19.1%, respectively. Microsoft trades at 34 times forward fiscal 2024 earnings and 12 times forward sales. While the valuation seems lofty, the premium may be warranted given Microsoft’s long-term AI growth prospects.

What Do Analysts Say About Microsoft Stock?

Wall Street’s optimistic outlook for this tech giant remains unchanged, with a consensus “strong buy” rating. Out of 36 analysts, 32 rate MSFT stock a “strong buy,” three rate it a “moderate buy,” and one rates it a “hold.” 

The mean target price for MSFT stock is $421.75, which is 2.6% above current levels. However, the high target price of $600 implies an upside potential of 45.9%.

The Key Takeaway

Despite fierce competition in the tech sector right now, with every prominent player scrambling to capitalize on AI opportunities, Microsoft possesses a few advantages. Its extensive industry experience, robust AI platform, strategic investments, and legacy product portfolio have propelled it to the forefront. I believe Microsoft’s earnings will continue to soar at a rapid pace, propelling its stock to new heights in the forthcoming years. MSFT could emerge as one of the premier growth stocks to acquire and retain indefinitely.

On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

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