MSFT Stock Price Prediction: 3 Big Reasons to Own Microsoft Now

microsoft (NASDAQ:MSFT) Copilot is currently offering GPT-4 Turbo for free. We don’t know what that means for MSFT stock, but it does show the company’s commitment to AI.

CNET contributor Don Reisinger points out that this move is a sign that OpenAI is likely getting closer to launching GPT-4.5 Turbo, which means It will be targeted at Copilot Pro users who pay $20 per month.

“GPT-4 Turbo has been trained with data up to April 2023, can also handle text-to-speech prompts, and its context window can accept 128,000 tokens, the highest amount offered in the GPT version. ” Reisinger wrote on March 13th.

“Tokens are fragments of words. The more tokens a model can accept, the more text users can input into the model to provide additional context and get better results. ”

Before you know it, you’ll be able to access GPT-27 Turbo via Copilot. I’m just kidding, but that’s another reason I like Microsoft stock.

There are three others.

Generative AI is just getting started

We talked about generative AI at the beginning, but I think it’s worth mentioning the potential financial benefits from Microsoft’s efforts to embed it throughout its business.

Motley Fool Wells Fargo analysts’ March 14 comments on Copilot for Security suggest the company’s latest security products for generative AI are a great fit for Microsoft’s cloud infrastructure offering, Azure. are doing.

Motley Fool contributor Danny Vena writes, “Wells Fargo analysts believe that this latest offering will help Azure, Microsoft’s cloud infrastructure service, improve in the fiscal fourth quarter (ending June 30).” ), we believe it will grow in stages from fiscal year 2025. “Analysts cite consumption-based pricing of the service, which they believe will drive adoption.”

Vena also said that ISI Evercore analyst Kirk Materne believes Microsoft’s generated AI revenue could reach $143 billion by 2027.

This is one reason why MSFT stock is trading at a premium of 36 times its forward P/E ratio of 28 times. S&P500.

Improving profit margins means increasing profits

like Nvidia (NASDAQ:NVDA), Microsoft is investing heavily in AI. Significant returns are expected from these investments. One way to make sure you’re getting a good return on your investment is to stretch your margins.

For example, if your annual sales are $1 billion, your gross profit margin is 50%, your operating margin is 25%, and your effective tax rate is 21%, your net income is $197.5 million and your net profit margin is 19.7% . Increasing gross and operating margins by 500 basis points would increase net income by x% to $237 million, resulting in a net profit margin of 23.7%, 400 basis points higher than the same investment.

Microsoft’s gross profit margin for the second quarter of fiscal 2024 (end of June) was 68.4%, an increase of 160 basis points from the second quarter of 2023. Further down the income statement, operating profit was up 33% year-on-year, with a high operating margin. was 43.6%, an increase of 490 basis points from the previous year.

Assuming the same valuation multiple, it should be worth more. But with this kind of growth, investors pay more money, making it even more valuable.

Rinse and repeat.

Maintain shareholder-friendly capital allocation

It had nearly $30 billion in free cash flow in the first two quarters of 2024, with more cash flow expected in the second half of the fiscal year.

The company’s major expense in the first half was the $66.2 billion acquisition of Activision Blizzard, which will add to future free cash flow generation. Cash on its balance sheet as of December 31, 2022, ended the second quarter with an 11% increase, despite a 57% increase in capital spending in the first half.

The acquisition was an all-cash transaction, so the amount of debt issued far exceeded the amount of debt repaid. Next year, that will reverse.

The company paid $10.63 billion in dividends in the first half of fiscal 2024, while also conducting $8.83 billion in share buybacks, returning nearly $20 billion to shareholders.as Barons According to a March 13 report, the company paid out $20.7 billion in dividends in fiscal 2023, more than any other company.

Companies can be innovative and At the same time, it is shareholder-friendly.

MSFT is required.

On the date of publication, Will Ashworth did not have (directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author; InvestorPlace.com Publishing Guidelines.