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Artificial intelligence (AI) will definitely be “The Next Big Thing,” at least for certain companies.
Everyone knows about Nvidia (NVDA). And then there is the company that makes their chips for them, Taiwan Semiconductor Manufacturing (TSM). Taiwan Semi recently forecast that revenue from AI will grow at a compound annual rate of 50% for the next five years, to account for more than 20% of the company’s revenue by 2028.
But what about the other companies that are getting a major boost from the dawn of the Age of AI?
Understanding where AI technology is starting to yield real business results - and where it isn’t - will be key to distinguishing the AI winners from the AI losers in the coming years.
One obvious winner is Microsoft (MSFT).
How Microsoft Is Leveraging AI
The company is already benefiting from AI, thanks to its cloud computing division, Azure, which gives companies the ability to train their own AI models.
Sales in Microsoft’s cloud division, its biggest revenue driver that includes its Azure computing platform, climbed 21% in its latest quarter to $26.7 billion, compared with analysts’ forecasts for $26.2 billion and above company guidance. Microsoft’s Azure revenues grew 31% year on year, ahead of Wall Street’s 28% consensus forecast.
In a very promising sign, 7 percentage points of this growth came through AI products, up from 6 points in the last quarter and 3 in the quarter before that.
And this growth could have been even greater if Microsoft wasn’t facing capacity constraints. On the company’s earnings call, CFO Amy Hood said, “Currently, near-term AI demand is a bit higher than our available capacity.”
That’s why the company is expected to up its capex spending quite a bit over the next few years. Quarter-on-quarter capex will keep growing and top $60 billion in Microsoft’s 2025 fiscal year. This would be more than double the $28.1 billion Microsoft spent in the year to June 2023.
One flagship Microsoft product to watch closely is the 365 Copilot generative AI assistant, which has been integrated into its suite of productivity apps. The company has so far not disclosed sales or user figures for Copilot, which is priced at $30 per user a month for businesses.
Microsoft’s chair and CEO Satya Nadella said nearly 60% of Fortune 500 companies were now using Copilot, which was experiencing “accelerated adoption.”
The company's GitHub coding platform is also gaining traction, recording 1.8 million customers during the period, up from 1.3 million last quarter. The AI-coding assistant is powered by OpenAI’s large language model (LLM) and helps streamline developers’ work by predicting lines of code, answering questions and converting code from one programming language to another.
Buy MSFT Stock
The fact that Microsoft stock is trading on a forward price/earnings (P/E) ratio of 31, compared with 21 for Meta Platforms (META) and 22 for Alphabet (GOOGL), indicates that the market believes MSFT is leading the AI race.
And for good reason - Microsoft took an early lead in the race to dominate generative AI following its $13 billion investment in OpenAI, and this year, the company has invested in the European AI startup Mistral, and hired the bulk of the staff of rival AI startup Inflection.
Microsoft’s early lead is a big factor behind Azure’s current growth rate of 31%, nearly double the 17% rate of the AWS division at Amazon (AMZN).
Brad Sills, research analyst at Bank of America (BAC), summed it up nicely: Microsoft’s Azure offering “is the only software business that is benefiting from AI at this point in the cycle. Microsoft remains ahead of the curve in this massive new cycle.”
The company’s annualized revenue from generative AI is now estimated by Wall Street to be in the neighborhood of $4 billion.
Microsoft has one big advantage over the competition - it already has more than 400 million users of its Office 365 product, making it one of the largest enterprise software providers.
The company’s long-term strategy seems to be to create a new computing interface for AI through which all AI tools will flow. It’s really an old game plan, and similar to how Windows became the interface for the majority of office workers to interact with their computers.
I would not bet against Microsoft being successful with this strategy again.
It currently has about as diversified and strong a set of assets as any company in the technology industry. The company is one of just a few with a complete, integrated product set aimed at enterprise efficiency, cloud transformation, collaboration, and business intelligence. It also has a large and loyal customer base, a big cash cushion, and a rock-solid balance sheet.
That makes MSFT stock a buy below $420.
