Why Microsoft Stock Is a Super-Smart Bet in the AI Race

Stocks to buy

Despite being a leader in the rollout of artificial intelligence products, Microsoft’s (NASDAQ:MSFT) stock hasn’t set the world on fire lately. That might be about to change. Year to date, Microsoft stock is up 13%, which is a little better than the 11% gain achieved by the benchmark S&P 500 index.

In the last 12 months, the technology giant’s stock has risen 46%. While decent, the gains pale in comparison to those achieved by other companies that are closely associated with AI. Nvidia’s (NASDAQ:NVDA) stock is up 225% over the last year while Meta Platforms’ (NASDAQ:META) share price has increased 136%.

Of course, Microsoft is more than an AI company. But it is AI that is likely to drive the company’s sales and profits, and share price, moving forward.

Big AI Bets

Microsoft has been making big bets on AI ever since it invested $10 billion into privately held OpenAI, the company whose AI chatbots took the world by storm last year. More recently, Microsoft has announced plans to build a massive data center to run AI software that could require an investment of $100 billion. That would be an incredible investment considering that Microsoft’s total capital spending over the last four years combined was $104 billion.

The data center investment, which also involves plans to develop an AI supercomputer called “Stargate” for launch in 2028, is the latest example of Microsoft going all-in on AI. In February of this year, Microsoft announced that it is ramping up its investments in AI around the world, pledging to spend $5.60 billion in Europe alone. At the same time that it is increasing its spending, Microsoft is also pushing to monetize the technology and boost its sales and profits.

The best example of the monetization efforts can be found with Microsoft Copilot, the company’s AI chatbot or assistant. Microsoft is now charging subscriptions of $30 a month for access to Copilot, and Wedbush tech analyst Dan Ives forecasts that it could add $25 billion to $30 billion to Microsoft’s revenues by 2025. Ives recently boosted his price target on MSFT stock to $500 from $475 and stated that the “AI revolution is here.” Also citing the monetization of Copilot, Bank of America (NYSE:BAC) maintained a “buy” rating on Microsoft’s stock and a $480 price target, calling the company a “top pick.”

Other Strengths

Beyond AI, there are many other business units that are accelerating and benefitting Microsoft. These include the Xbox unit following the successful $69 billion acquisition of video game maker Activision Blizzard, and the Azure cloud-computing segment. Cloud was a particular bright spot in Microsoft’s fourth quarter 2023 earnings report. The company reported that revenue from Azure and other cloud services grew 30% year over year in Q4. Analysts had forecast growth of 27.7%.

Microsoft stock now has 53,000 Azure AI customers, and one-third of them are new to Azure in the past year, said the company in its earnings release. Commitments to spend more than $1 billion on Azure cloud services in the year ahead increased during Q4 2023. Today, Microsoft is the second largest cloud-computing company in the world after Amazon (NASDAQ:AMZN). Data from the Synergy Research Group shows that Microsoft’s Azure infrastructure controls 20% of the world’s $130 billion cloud market.

Together, Amazon and Microsoft control 52% of the global cloud market, and cloud-computing remains a huge growth driver at Microsoft.

Buy MSFT Stock

Microsoft stock achieved a milestone earlier this year when its market capitalization surpassed $3 trillion and it became the biggest publicly traded company in the world. Going forward, more growth and gains can be expected, especially as the company monetizes its AI offerings. With leading role in areas ranging from not only AI but also video games, cloud-computing, and software, Microsoft remains a best-in-class technology concern that should be part of every investors’ portfolio. MSFT stock is a buy.

On the date of publication, Joel Baglole held long positions in NVDA and MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.

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