As the Nasdaq Composite surged an impressive 43% in 2023, Wall Street reveled in the market’s resurgence. But could a pullback be on the horizon? History indicates otherwise. Since 1972, the Nasdaq has exhibited an average 19% gain in the year following a market recovery. With conditions ripe for growth, the current rally may have further room to run.
Artificial intelligence (AI) breakthroughs, which played a pivotal role in jump-starting the market recovery, are now poised to catalyze productivity gains in the trillions of dollars—an element that could fuel a prolonged bull market. At the forefront of this trend stands Microsoft (NASDAQ: MSFT), positioned to ride these secular tailwinds to even greater heights, having surged 57% in 2023.
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Unveiling a Potential Goldmine
Microsoft, an early adopter of generative AI, has witnessed a resounding success with Copilot—an illuminating example of its triumph. Integral to Microsoft’s core products, Copilot enables users to elicit heightened productivity. CEO Satya Nadella, on a recent earnings call, cited studies displaying a remarkable “70% improvement” driven by generative AI tools like Copilot. Notably, Microsoft 365 users accomplished tasks such as searching, writing, and summarizing tasks 29% faster. This is one of numerous applications brought to life for Copilot, with new additions surfacing continually.
Moreover, Microsoft has expanded Copilot’s effectiveness by integrating it with various third-party platforms like Salesforce, ServiceNow, and Zendesk, broadening its functionality and enlarging the total addressable market—a promising sign for the future.
Azure Propels Market Share Gains
The burgeoning demand for AI is set to be served most effectively through the cloud. While Amazon Web Services (AWS) historically dominated this domain, Microsoft has pivoted opportunistically as AWS’s growth decelerated. Microsoft’s fiscal 2024 second quarter revealed impressive gains in market share for Azure, with its Cloud revenue soaring 30% year over year, outstripping AWS and Alphabet’s Google Cloud at 13% and 26% growth, respectively. Of particular note, six percentage points of this growth stemmed from AI services, doubling the previous quarter’s impact.
Beyond AI
Although AI steals the limelight, other prospects stand ready to elevate Microsoft’s performance. The recovery in the PC market—an area historically yielding nearly one-third of Microsoft’s revenue—has commenced, with segment revenue expanding by 19% year over year, marking its most substantial growth in nearly three years. This resurgence may continue to propel future results.
Despite its meteoric rise, Microsoft has merely scratched the surface of the AI opportunity. This, in turn, could fuel growth across its software-as-a-service and cloud infrastructure businesses. Notably, Microsoft’s valuation, at 37 times earnings and 13 times sales, stands at a reasonable premium to the overall market, a premium justified by the wealth of opportunities ahead and the company’s track record of seizing them.
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