Artificial intelligence is the next stage in Microsoft’s growth cycle. The rise of generative AI creates several growth opportunities for both the tech giant’s cloud and search engine businesses. Here are three key reasons having Microsoft in your portfolio will drive durable, long-term gains.
Strong Earnings Report to Start 2024
Despite broader market turmoil, late April had some bright spots. Software giant Microsoft was able to deliver a strong Q3’FY2024 earnings beat.
Microsoft’s revenue figure for their third quarter came in at $61.9 billion, above Wall Street’s average sales estimate of $60.9. This represented a solid 17% year-over-year increase from the same period in their prior fiscal year.
Similarly, Microsoft’s reported net income and earnings per share figures were strong. The tech giant delivered $21.9 billion in net income, a 20% year-over-year increase, while EPS came in at $2.94/share.
In essence, Microsoft reported double-digit growth figures in all of its key business segments. The company’s Intelligent Cloud, which includes Microsoft Azure services, reported 21% Y/Y revenue growth.
Microsoft’s once-flailing Xbox segment reported a 62% Y/Y increase in revenue due to positive revenue impacts from the controversial Activision merger.
These key data point to a growing business despite steady macro headwinds, which is what investors should be looking for in a global tech business.
Microsoft Azure remains a key business growth engine
Microsoft Azure is the tech giant’s key cloud product and main driver of top-line growth. In the company’s most recent earnings report, Azure revenue grew 31%, compared with 30% in the previous quarter.
Artificial intelligence capabilities undergirded much of the cloud service’s growth. According to CNBC, 7 percentage points of Azure’s growth was related to AI, which is an increase from the last earnings season.
Artificial intelligence will probably continue driving Microsoft Azure’s growth. In particular, as servers increasingly take on the deployment of AI models, cloud services will become crucial to powering artificial intelligence. Azure’s growth, given this, is very much welcomed.
While MSFT’s valuation is high, it is not stretched
U.S. equities have endured several weeks of persistent volatility. The S&P500 and Nasdaq Composite fell 4.16% and 4.41%, respectively, in April.
This substantial loss, one of the largest in a while, brought their overall year-to-date respective return to 7.50% and 5.53%. Microsoft’s stock also had a rough April. The tech giant’s share price fell 7.46%.
So far, the stock’s year-to-date return sits at 8.34%, which is above the market but trails other tech giants like Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL), Nvidia (NASDAQ:NVDA), and Amazon (NASDAQ:AMZN).
That brings us to Microsoft’s valuation. The company’s stock trades at 32.1x forward earnings, which remains below that of Amazon and Nvidia.
Having a valuation in the middle of the pack makes Microsoft’s valuation high but not overly stretched. In a market of inflated multiples, Microsoft isn’t the highest and that should bring some reprieve to potential investors.
On the date of publication, Tyrik Torres did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tyrik Torres has been studying and participating in financial markets since he was in college, and he has particular passion for helping people understand complex systems. His areas of expertise are semiconductor and enterprise software equities. He has work experience in both investing (public and private markets) and investment banking.