Tech giant Microsoft’s (MSFT) growth story began long before artificial intelligence (AI) entered the picture. With a strong product portfolio, it has built a very successful business, steadily increasing revenue and earnings over the last decade. Microsoft stock has returned 973% over the last ten years. In 2023, the stock gained 56%, driven by the AI rush and strong quarterly numbers.
Its recent second quarter of fiscal 2024 has proven to be an impressive story. Microsoft noted in the Q2 earnings call that, in addition to its own research, external studies have shown that generative AI leads to a 70% improvement in productivity – suggesting AI will play a critical role in transforming work going forward.
Given its AI-driven cloud strength, Microsoft is likely to reach its high target price of $600 by the end of the year. Valued at $3 trillion, MSFT shares are up 9.3% year-to-date, outperforming the tech-heavy Nasdaq Composite’s ($NASX) gain of 5.8%.
Microsoft’s Cloud Platform Drives Extraordinary Growth
Microsoft’s cloud computing platform, Azure, has been a driving force behind growth. Azure is ranked second in the cloud computing market, with a 22% share, lagging behind Amazon’s (AMZN)AWS (Amazon Web Services).
In the second quarter of fiscal 2024, the Intelligent Cloud segment brought in $25.9 million in revenue, an increase of 20% year-over-year. The segment’s operating income also rose 40% to $3.6 billion. The segment accounted for 42% of Microsoft’s total revenue of $62 billion, which grew 18% from the prior-year quarter, Adjusted earnings also jumped 26% year-over-year to $21.9 billion. Both revenue and earnings surpassed the consensus estimate.
Notably, Azure and other cloud services revenue soared 30% year-over-year in the quarter. CEO Satya Nadella highlighted in the Q2 earnings call that Azure AI now has 53,000 customers.
Microsoft has now integrated AI into all of its products, including Windows, Office 365, and others, which has enhanced each segment’s performance. While the personal computing market’s slow recovery hampered the segment in previous quarters, it increased 19% in the second quarter to $16.9 billion.
Moreover, in the Productivity and Business Processes segment, Microsoft Cloud offerings increased the remaining performance obligation (RPO) of commercial businesses by 17%. RPO measures the upcoming revenue opportunity, which is the contract revenue that has yet to be recognized. The company expects 45% of RPO to be recognized as revenue over the next 12 months.
The AI Wave Will Continue to Paint A Bright Future for MSFT
Looking ahead, management expects Productivity and Business Processes segment revenue to increase by 10% to 12% in Q3, reaching $19.3 billion to $19.6 billion, owing to long-term Azure contracts and growing renewals.
Similarly, the Intelligent Cloud segment could grow by 18% to 19%, driven by Azure AI, while the Personal Computing segment’s revenue could rise by 11% to 14%. Microsoft ended the quarter with a sizable cash, cash equivalents, and short-term investment balance of $81 billion, as well as $44.9 billion in long-term debt. Management intends to continue scaling the company’s cloud operations and AI investments.
For the full fiscal year, analysts predict revenue and earnings to increase by 15.2% and 19.1%, respectively. Microsoft trades at 34 times forward fiscal 2024 earnings and 12 times forward sales. While the valuation appears to be high, the premium may be justified given Microsoft’s long-term AI growth prospects.
What Do Analysts Say About Microsoft Stock?
Wall Street’s optimistic outlook for this tech giant remains unchanged, with a consensus “strong buy” rating. Out of 36 analysts, 32 rate MSFT stock a “strong buy,” three rate it a “moderate buy,” and one rates it a “hold.”
The average target price for MSFT stock is $421.75, which is 2.6% above current levels. But the high target price of $600 implies an upside potential of 45.9%.
The Key Takeaway
While competition in the tech industry is fierce right now, with every major player racing to capitalize on AI opportunities, Microsoft has a few advantages. Its extensive industry experience, strong AI platform, strategic investments, and legacy product portfolio have propelled it to the forefront. I believe Microsoft’s earnings will continue to grow at a rapid pace, causing its stock to skyrocket in the coming years. MSFT could be one of the best growth stocks to buy and hold indefinitely.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
Wanda Parisien is a computing expert who navigates the vast landscape of hardware and software. With a focus on computer technology, software development, and industry trends, Wanda delivers informative content, tutorials, and analyses to keep readers updated on the latest in the world of computing.
