As the stock market gears up for another quarterly earnings season, all eyes are on the technology sector, which is poised to be a wellspring of value in the impending artificial intelligence (AI) revolution. Among the key companies at the forefront, Microsoft (NASDAQ: MSFT) is making waves with remarkable growth in its AI-related segments. The company’s fiscal 2024 second-quarter results are in, and the numbers are nothing short of impressive. Investors are now envisioning the future and might find themselves regretting not betting on Microsoft. Here’s why.

Image source: Getty Images.

Microsoft’s Copilot Revolutionizes AI

Kicking off with Microsoft’s virtual assistant, Copilot, powered by large language models and generative AI, the platform has gained significant momentum in Q2. Integrated across Microsoft’s product portfolio, it comes packed with features to enhance productivity across Windows, Edge, Bing, and Office 365 applications. The potential for Copilot to drive substantial financial gain is evident with over 400 million paid 365 seats eligible for the Copilot upgrade and an array of businesses leveraging its capabilities.

Additionally, Copilot for the Microsoft Power Platform has seen a staggering 80% increase in usage, empowering over 230,000 businesses to build websites and applications without any code. The introduction of Copilot Studio further elevates the platform, catering to the customization needs of organizations, solidifying its position as an indispensable productivity tool.

Azure: Microsoft’s Revenue Powerhouse

Microsoft’s Q2 revenue hit a record-high of $62 billion, reflecting an 18% increase year over year, with the Intelligent Cloud segment leading the charge. Azure, in particular, saw a commendable 30% revenue growth, with AI contributing a remarkable double-digit percentage of that growth. Business customers are leveraging OpenAI’s latest GPT-4 models through Azure and Microsoft’s strategic initiatives have attracted over 53,000 new Azure AI customers, including more than half of the Fortune 500 companies. Deal sizes are on the rise, with billion-dollar contracts becoming a norm, signaling a promising future for Microsoft’s AI offerings.

Microsoft Stock: A Regrettable Miss?

With Q2 earnings per share standing at $2.93, a 33% increase from the previous year, Microsoft has surpassed Wall Street’s expectations, reaffirming its strong position in the market. However, the stock’s price-to-earnings (P/E) ratio of 36.8 might raise a few eyebrows. But Microsoft has undeniably earned this premium, given its AI prowess and the compelling potential for future growth.

Azure’s Meteoric Growth

Microsoft Azure, the world’s second-largest cloud platform, is rapidly outpacing its competitors. In its most recent quarter, Azure’s revenue surged by 29%, far outstripping the 12% growth of Amazon Web Services (AWS) – Azure’s primary rival in the cloud computing industry. Its growth trajectory continued into the subsequent quarter, with a remarkable 30% increase. This surge solidifies Azure’s position as a formidable force in the global cloud computing landscape, swiftly gaining ground on its competitors.

The Influence of AI

At the heart of Azure’s ascent is its robust investment in artificial intelligence (AI). Microsoft’s massive scale, bolstered by its extensive Office 365 user base, positions it uniquely to capitalize on AI software. The seamless transition to AI-enabled applications within its existing ecosystem presents a significant opportunity for Microsoft. By upselling its current user base rather than acquiring new customers, the company stands to propel substantial financial growth through the monetization of AI software.

A Rosy Outlook for Investors

For investors, Microsoft’s exponential growth trajectory paints a promising picture. Even a modest compound annual growth rate of 10% over the next five years could yield a remarkable 61% increase in its stock price, assuming a constant price-to-earnings (P/E) ratio. Notably, Microsoft’s recent earnings surged by an impressive 30% in the first six months of fiscal 2024, suggesting that a 10% growth rate might indeed be a conservative estimate. The company’s strategic focus on AI and the resultant financial performance positions it as an appealing investment prospect for discerning investors.