The tech sector continues to be propelled by the artificial intelligence (AI) wave, with Microsoft (NASDAQ:MSFT) navigating the currents adeptly. This stalwart in the tech industry has capitalized swiftly on the AI trend, fueled by its substantial investment in OpenAI, propelling the stock to a recent all-time high of $394.03 in Tuesday’s post-holiday trading.
Surpassing Apple (NASDAQ:AAPL) in market value, Microsoft now holds the title of the world’s most valuable public company, boasting a market cap of $2.90 billion compared to AAPL’s $2.83 billion, partially attributed to AAPL facing challenges from multiple analyst downgrades in January.
Looking ahead, at least one analyst foresees significant upside potential for Microsoft stock. The question arises: Can the momentum from AI growth propel the stock to reach $600 per share? Let’s delve into a closer examination.
Evaluating MSFT’s Value
Microsoft stock has demonstrated remarkable performance, outshining the broader market over the past year with a 60.7% increase in the last 52 weeks, compared to the Nasdaq Composite’s 32.7% return.
Similar to other AI-related tech stocks, MSFT is not currently considered cheap. However, the current valuation metrics, while elevated, have receded from historical peaks. Presently, the stock trades at a forward price-to-earnings (P/E) ratio of 34.9x and a price-to-sales ratio of 11.9x, a decline from the over 40x forward earnings seen in September 2020.
Additionally, Microsoft’s consistent dividend growth is noteworthy, positioning the company on track to achieve Dividend Aristocrat status this decade. With a forward yield of 0.77%, paying $0.75 per share each quarter, MSFT provides investors with an attractive blend of income and growth. The company’s ample free cash flow and low payout ratio leave room for potential future dividend increases.
AI-Driven Earnings Surge at MSFT
In its fiscal Q1 earnings report, Microsoft exceeded expectations with earnings per share (EPS) of $2.99 and revenue of $56.52 billion, outperforming Wall Street’s predictions. The upcoming quarterly release, scheduled for Jan. 23, is anticipated to report earnings of $2.75 per share, reflecting an 18.53% year-over-year increase.
The pivotal role of AI in Microsoft’s growth is evident, particularly in its Azure segments. In the recent quarter, Azure and cloud services revenue surged by an impressive 29%, with 3 points of Azure’s growth attributed to AI, surpassing the company’s own expectations. CEO Satya Nadella highlighted the initiation of new AI projects, emphasizing that these projects drive growth not only in AI metrics but also across other cloud metrics.
Microsoft’s AI services, including the Copilot programming assistant, are driving adoption of Azure, with 40% of Fortune 100 companies already utilizing Copilot in preview. The company’s strong integration between productivity suites and Azure services provides an advantage over competitors like Amazon and Google, leading analysts to suggest Microsoft may surpass AWS as a hyperscale provider.
Analysts’ Positive Outlook
Analysts share a positive sentiment regarding Microsoft’s future prospects, with Truist Securities analyst Joel Fishbein initiating coverage with a “buy” rating and a three-year price target of $600, implying a 55% upside from current levels. Wedbush analyst Daniel Ives raised his target price to $450, emphasizing confidence in sustained AI-powered growth, projecting Azure to become a $1 trillion market in the next decade.
Other analysts, like Frederick Havemeyer at Macquarie, foresee upside for Microsoft driven by increased enterprise spending on digital transformation and cloud migration. On average, analysts anticipate Microsoft to achieve earnings per share of $11.14 in fiscal year 2024, reflecting a 13.56% growth from the prior year, with revenue forecasted to rise by 14.7% to $243.06 billion.
With a “strong buy” consensus from Wall Street based on 37 analysts’ recommendations, the mean price target for Microsoft stands at $408.89, representing a potential 5.6% upside from current levels.
Conclusion
In conclusion, the prospect of Microsoft stock surging to $600 per share fueled by AI growth seems plausible. Despite the relatively stretched valuations, Microsoft’s market-leading position, robust AI performance, and optimistic projections for sustained growth make the stock an appealing choice. As Microsoft continues to spearhead AI and cloud technologies, it remains a top pick for growth investors, with the added bonus of a consistent dividend.
Featured Image: Unsplash
