Microsoft (NASDAQ:MSFT) has long been a robust player in the tech industry, and its foray into the artificial intelligence (AI) sector has only added to its success. The company boasts a diversified business portfolio that has consistently delivered profits, even in the face of macroeconomic challenges. Over the past decade, Microsoft has witnessed an impressive 834% increase in its stock value.
In the most recent development, Microsoft’s stock has surged by 36.6% year-to-date, outpacing the Nasdaq Composite‘s 15% gain. Microsoft’s early involvement in AI is now bearing fruit. Its robust performance in the first quarter of fiscal year 2024 has generated optimism on Wall Street regarding the company’s capacity to harness AI opportunities, leading to a more than 2% increase in its stock price.
The Role of Artificial Intelligence in Enhancing Microsoft’s Performance
Microsoft’s fiscal 2024 first-quarter results, which concluded on September 30, demonstrated the company’s prowess. It surpassed analysts’ expectations for both revenue and earnings, with net profits amounting to $22.3 billion or $2.99 per share, exceeding estimates by $0.34. Earnings also surged by an impressive 27% year-over-year. The company reported $56.5 billion in revenue, marking a 13% increase compared to the previous year and surpassing forecasts by approximately $2 billion.
Microsoft’s personal computing (PC) business had encountered challenges in recent quarters. However, in the first quarter, this segment experienced a 3% revenue increase, reaching $13.7 billion, primarily driven by a boost in Windows revenue. The PC segment also encompasses gaming revenue, which grew by 9% to $309 million, attributed to the growth in Xbox content and services.
On October 13, Microsoft successfully closed its $69 billion acquisition of Activision Blizzard, a California-based company renowned for popular games such as Call of Duty, World of Warcraft, and Diablo. This acquisition is poised to further elevate the company’s gaming revenue in the upcoming quarters.
Additionally, revenue in the productivity business segment, which includes Office products, LinkedIn, and other dynamic offerings, soared by 13% to $18.6 billion in the quarter.
Microsoft’s Strategic Embrace of AI
Microsoft’s significant investment in OpenAI in 2019, followed by the announcement of the third phase of their partnership in early 2023, underscores the company’s commitment to integrating AI across its flagship Office products and its enterprise cloud platform, Azure. CEO Satya Nadella highlighted that “more than 18,000 organizations now use Azure OpenAI service, including new-to-Azure customers.”
The Pivotal Role of Microsoft’s Cloud Segment
Microsoft holds the second-largest market share in the cloud industry, boasting a 22% share, just behind Amazon’s Amazon Web Services (AWS). In the first quarter, its Intelligent Cloud-based segment, powered by Azure AI, reported extraordinary growth of 19%, reaching $24.3 billion.
Microsoft concluded the quarter with significant cash reserves amounting to $144 billion, along with long-term debt of $42 billion. Moreover, the company’s free cash flow surged by 22% year-over-year to $21 billion.
Management has also underlined Microsoft’s comprehensive approach to infusing AI at every level of the technology stack and across various business processes to enhance customer productivity.
Anticipated Growth in the Second Quarter and Beyond
Microsoft is optimistic about sustained growth, driven by the integration of AI into its products. In the second quarter, the company anticipates Intelligent Cloud revenue to grow by 17% to 18%, landing in the range of $25.1 billion to $25.4 billion, with Azure playing a pivotal role in achieving potential growth of 26% to 27%.
The outlook for fiscal second-quarter revenue points to a range of $60.4 billion to $61.4 billion, representing a growth of around 15%. Analysts expect revenue to reach approximately $58 billion for the same period. With a positive outlook, Microsoft’s management states, “We will continue to deliver healthy growth in the year ahead, driven by our leadership in commercial cloud and our commitment to lead the AI platform wave.”
Looking further ahead, analysts predict Microsoft’s revenue to increase from $212 billion in fiscal 2023 to $241 billion in fiscal 2024, reflecting year-over-year growth of 14%. In fiscal 2025, analysts project further revenue growth of approximately 13%, reaching $271 billion.
Furthermore, analysts anticipate a substantial increase in earnings per share (EPS), with an 11.1% jump to $10.90 in fiscal 2024, followed by an increase to $12.43 in fiscal 2025. Microsoft’s current forward earnings multiple, based on fiscal 2025 growth estimates, stands at 26 times, which appears reasonable for a company poised for hyper-growth.
Analysts and Wall Street’s Take on Microsoft
Following the robust quarterly results and positive outlook, various analysts, including those at Piper Sandler, BofA, and Goldman Sachs (NYSE:GS), have raised their target prices for Microsoft’s stock. Wall Street consensus strongly favors Microsoft, with 30 out of 36 analysts rating it as a “strong buy,” while three recommend a “moderate buy,” and three suggest a “hold.”
The average price target among analysts for Microsoft is $386.14, indicating a potential upside of around 14% over the next 12 months. Price targets vary from a high of $440 to a low of $232.
Conclusion
AI stands as a transformative force, and investing in companies at the forefront of AI technology presents a compelling opportunity for long-term investors. Microsoft, with its renowned brand, commitment to innovation, robust financial standing, and a comprehensive strategy to integrate AI across its diverse business segments, positions itself for substantial gains in the long run. However, the AI sector remains relatively unexplored, so investors should exercise caution while making investment decisions.
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Author Faith Yakubu 
