Microsoft's Growth in Artificial Intelligence: A Strong Investment for the Future

Microsoft is experiencing substantial growth across its portfolio of artificial intelligence products and services.

Microsoft (MSFT 2.12%), Apple, and Nvidia are the only three companies in the world with a valuation of $3 trillion or more. While Nvidia leads in AI chip manufacturing, Microsoft is rapidly establishing itself as a front-runner in AI software.

The company recently announced its financial results for the first quarter of fiscal year 2025 (which ended on September 30). Notably, Microsoft has seen remarkable growth from its Copilot AI assistant and its AI cloud services.

For investors with some cash to spare, a compelling opportunity may be to use $420 to purchase one share of Microsoft, holding onto it until at least 2030.

The Copilot AI Assistant Drives Significant Growth

In early 2023, Microsoft decided to invest $10 billion in OpenAI, the creator of ChatGPT. Microsoft didn’t hesitate to leverage OpenAI's cutting-edge AI models to develop its own virtual assistant known as Copilot. This tool can quickly generate text, images, computer code, and even answer complex questions across various subjects.

Copilot is freely available on many of Microsoft's primary software products, including Windows, the Bing search engine, and the Edge browser. Additionally, users of the 365 platform (which includes applications like Word, PowerPoint, Excel, and more) have the option to use Copilot with an additional monthly subscription. This could potentially translate into a significant revenue stream for Microsoft, given that businesses worldwide currently pay for over 400 million 365 licenses.

According to Microsoft's Q1 report, 70% of Fortune 500 companies are employing Copilot for 365 services. Although the exact number of businesses using it isn't disclosed, CEO Satya Nadella stated that daily usage of Copilot more than doubled in Q1 compared to the previous quarter.

For instance, the telecommunications giant Vodafone is rolling out Copilot for 365 to over 68,000 of its employees after initial trials showed it saved workers three hours weekly.

Moreover, Microsoft experienced robust growth in its Copilot Studio platform during Q1. This platform allows companies to create specialized Copilot versions for various applications. For example, a business can develop one Copilot for Teams to assist in scheduling meetings while creating another for 365 to derive insights in Excel.

As of the end of Q1, over 100,000 organizations had used Copilot Studio, which has doubled in just three months.

Azure Continues to Thrive, Fueled by AI Growth

Microsoft's Azure cloud platform consistently ranks as one of the fastest-growing segments within the company. It offers a wide array of services that support businesses in adapting to the digital landscape, spanning simple data storage solutions to sophisticated software development tools. Azure also features Azure AI, which provides numerous services designed to help businesses develop and implement AI in their everyday operations.

Developers utilizing Azure AI can tap into powerful data center computing resources powered by leading chips from manufactures like Nvidia and Advanced Micro Devices. Notably, Azure was the first cloud platform to introduce a system that utilizes Nvidia's new Blackwell-based GB200 graphics processing units (GPUs), the most advanced in performing AI inference.

Furthermore, Azure grants access to the latest large language models (LLMs), including OpenAI's cutting-edge models. Microsoft reports that usage of its Azure OpenAI platform has more than doubled in the past six months, as businesses harness AI-powered digital assistants to enhance employee productivity.

Overall, Microsoft's Azure revenue surged by 33% in Q3 compared to the same period last year. Of that growth, AI services contributed an impressive 12 percentage points—up from eight percentage points in the previous quarter. This trend of accelerated growth has been evident in every quarter since Microsoft started reporting it over a year ago, with demand for data center infrastructure frequently surpassing supply.

In Q1, Microsoft allocated $20 billion to capital expenditures, primarily directed toward building AI data center infrastructure and acquiring chips. This followed a staggering $55.7 billion in capex spending throughout fiscal 2024. Therefore, it is essential for the company to demonstrate returns on this considerable expenditure, and the rapid growth of Azure AI serves as a promising indicator.

Microsoft's Investment Could Lead to Major Returns by 2030

AI technology may represent one of the most significant financial opportunities of our generation. Ark Investment Management previously predicted that AI could generate an astounding $200 trillion added to the global economy by 2030, capitalizing on its capacity to boost productivity among knowledge workers. Cathie Wood, Ark's Chief Investment Officer, posits that AI software firms might generate $8 in revenue for every $1 spent on chips.

If Wood’s predictions hold true, Microsoft’s substantial investments in AI infrastructure could yield returns worth hundreds of billions. Other organizations are also sharing trillion-dollar forecasts for the AI sector:

• PwC estimates that AI could contribute $15.7 trillion to the global economy by 2030.
• McKinsey & Company projects $13 trillion in additional economic activity from AI by 2030.
• Goldman Sachs anticipates AI could create $7 trillion in economic value over the next decade.

Reasons to Consider Buying Microsoft Stock Now

Microsoft has reported earnings per share of $12.12 over the last four quarters, and with its current stock price of $412.05, this translates to a price-to-earnings (P/E) ratio of 33.9. This is a slight premium compared to the Nasdaq-100 technology index, which is currently at a P/E ratio of 32.3, but it is near the lower end of Microsoft's P/E ratios for the year.

In my estimation, Microsoft deserves a premium valuation within the tech sector due to its strong leadership in AI software, especially regarding monetization efforts. Investors who purchase Microsoft stock at this time may look back in 2030 realizing what a bargain it was if the AI predictions mentioned earlier prove accurate.

Note: The author has no positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Goldman Sachs Group, Microsoft, and Nvidia.

Microsoft, AI, Investment