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Over the last year, artificial intelligence (AI) has exploded onto the scene, making headlines and sparking public interest. Although this technology has existed in some form since the 1950s, recent advances have created a model that allows you to create original content and streamline the process, resulting in dramatically increased productivity. did. This attracted the attention of both Main Street and Wall Street.
Dan Ives, a veteran technology analyst at Wedbush, said generative AI could spark the “Fourth Industrial Revolution” and said, “AI is a technology that we have seen since the internet began to take shape. “This is the most innovative technology ever created.”
It’s a bold view, but it’s spreading like wildfire through technology. Even the most conservative estimates suggest that generative AI could increase spending by more than $1 trillion over the next decade. Companies that stand to benefit from this paradigm shift will capture some of the windfall profits and enrich their shareholders in the process.
My portfolio is full of AI stocks, but the one I’m most excited about right now is microsoft (MSFT 1.22%).
Image source: Getty Images.
King once and forever
The nascent field of AI has been widely used in the technology industry for decades. Recommendations from streaming services and online retailers, voice and facial recognition on smartphones, and mapping and navigation software are just a few of the many ways AI is already enriching our lives.
Generative AI takes that to the next level. Generative AI can create original text and music, summarize data, draft email responses, create presentations from existing data, and even write and debug computer code. New applications for technology are being developed every day.
Microsoft recognized the utility of generative AI early on, investing $1 billion in ChatGPT creator OpenAI in 2019 and increasing its investment to $13 billion last year. The company quickly integrated this technology into many of its flagship products, incorporating AI capabilities to improve user productivity. Generative AI could also generate billions of dollars in additional revenue for Microsoft.
Perhaps the greatest potential lies with Copilot, Microsoft’s AI-powered digital assistant, variants of which are deeply integrated into the company’s most popular Software-as-a-Service (SaaS) products. His Copilot’s ability to streamline mundane and time-consuming tasks has earned him praise from Microsoft customers. The company recently revealed that 40% of Fortune 100 companies tested the product as part of an early access program, after which Copilot was made available for general release. “The Next Generation AI business will be the fastest growing $10 billion business in our history,” Chief Financial Officer Amy Hood said in an interview in mid-2023.
Considering the size of Microsoft’s customer base, the market potential for Copilot and similar AI tools could be very lucrative. The company has remained quiet so far, but Wall Street is weighing in on estimates. Dan Loeb, founder of hedge fund Third Point, has suggested that the technology could generate “more than $25 billion in software sales alone.” Evercore ISI analyst Kirk Materne’s estimates are gaining even more attention, as he predicts that generated AI could increase Microsoft’s coffers by more than $100 billion by 2027. I am making a trial calculation.
Azul aims for title
As businesses of all sizes scramble to reap the benefits of AI, the three largest cloud infrastructure providers are the best way to bring this technology to the masses and profit in the process. Amazon Web Services (AWS) has long been the leader in the industry it pioneered, but Azure is poised to take over.
In Microsoft’s fiscal first quarter of 2024 (ending September 30), Azure Cloud gained market share at the expense of its competitors. Microsoft’s cloud revenue grew 29% year over year, outpacing both companies. alphabetGoogle Cloud and AWS grew by 22% and 12%, respectively. reason? Microsoft said “approximately 3 percentage points” of Azure’s growth is a result of strong demand for AI.
According to research firm Canalys, AWS, Azure, and Google Cloud accounted for 31%, 25%, and 10% of global cloud infrastructure spending, respectively, in the third calendar quarter. If Microsoft continues to beat its rivals, it could eventually wrest the cloud crown from Amazon.
There will probably be more to come
CEO Satya Nadella said in 2016: [Microsoft’s] While taking a long-term view and preparing for the emergence of AI has been beneficial for the company, there are other factors that could push Microsoft even further.
The company’s more personal computing division is a prime example. The economic downturn reduced demand for PCs as consumers and businesses cut back on production to weather the economic storm. The division, which previously accounted for nearly a third of Microsoft’s revenue, was hit hard. However, according to Canalys, PC shipments are expected to increase by 8% in 2024, which could drive further growth. Additionally, if Microsoft continues to take share of the cloud market, it will benefit the company as well.
Despite gaining more than 60% over the past year, Microsoft’s valuation remains fairly reasonable, trading at 35 times forward earnings and 12 times forward sales. While this represents a small premium for the overall market, the size of the opportunity at hand shows why it is worth the premium.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Alphabet executive Suzanne Frye is a member of The Motley Fool’s board of directors. Danny Vena has held positions at Alphabet, Amazon, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon, and Microsoft. The Motley Fool has a disclosure policy.
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