HomeMost PopularIs Microsoft, At The Right Price, The Best AI Stock?

Is Microsoft, At The Right Price, The Best AI Stock?

Actionable Trade Ideas

always free

Microsoft headquarters in Bucharest, Romania

Investment Thesis

The stock market is influenced by investor sentiment and economic conditions. Sometimes, great companies trade at discounted prices due to pessimism, while other times, overhyped companies are valued unrealistically high. Artificial Intelligence (AI) often falls into the latter category, with many dismissing it as a buzzword used to attract investors. However, I see the AI revolution as a transformative force that promises immense productivity gains over the next decade.

Microsoft, with its extensive reach in the digital landscape, particularly through Microsoft 365, has a unique advantage in the AI arena. Microsoft’s impressive user base of approximately 345 million individuals presents an unprecedented opportunity for the integration of AI into its applications. This integration not only drives user growth for Microsoft but also catapults businesses worldwide into an era of unprecedented productivity.

Considering these factors, I believe that Microsoft is well-positioned to lead the AI market and outpace industry giants like Apple. It has the potential to become the cornerstone of the S&P 500 and solidify its position as the most valuable company for the next 5-10 years.

Microsoft’s AI Opportunity

Before delving into the specific AI opportunities, it’s important to appreciate Microsoft’s impressive growth journey. Over the past ten years, Microsoft has experienced astronomical revenue growth, accompanied by a surge in operating income. This showcases the company’s ability to grow efficiently.

The global AI market is currently valued at around $538 billion and projected to grow by 42% annually until 2032, reaching $2.6 trillion. Microsoft, with its diverse AI ventures, is well-positioned to capitalize on this growth. In June, Microsoft announced its expectation to generate $10 billion in AI-related revenue for 2023 with Azure Cloud and OpenAI’s models.

One area where Microsoft excels is its AI platform, which faces limited competition primarily from Google Cloud and Amazon’s AWS. Microsoft’s software assets, especially Office 365, are well-suited for AI advancements. Analysts are bullish on Microsoft, with price targets ranging from the high $300s to $440. They foresee significant revenue boosts driven by AI integration across Microsoft’s products.

Microsoft’s strategic partnership with OpenAI has proven successful, evident from its milestone of monthly revenue hitting $100 million. The company’s generative AI capabilities cater to specific needs, such as government application requirements, making Microsoft an attractive choice for various sectors.

Microsoft’s AI ventures extend beyond software applications. They also involve partnerships with global telecom and data center companies, allowing the company to establish a strong foothold in edge computing. Additionally, Microsoft’s AI-powered Bing and Edge have gained positive responses, positioning the company as a potential competitor in the search engine market.

The Main Risk is the Valuation

Despite Microsoft’s strong foundation, excellent management, and promising AI prospects, concerns arise regarding its valuation. While Microsoft isn’t the most expensive option among its peers, its current valuation closely aligns with the elevated levels of the past five years.

With a slightly overvalued price, it is advisable to wait for a more favorable entry opportunity before investing in this promising AI stock. By analyzing growth projections and using a discounted cash flow (DCF) model, Microsoft’s fair value estimate stands at $323, indicating a 1% overvaluation.

Game Plan & Conclusion

Microsoft’s potential in the AI revolution is undeniable, thanks to its vast customer base and strategic approach in the AI landscape. However, it is crucial to be cautious due to the current slight overvaluation of the stock. Without a margin of safety, it is wise to be careful, especially if unforeseen circumstances occur.

As someone with a significant stake in Microsoft, my advice for others in a similar position is to hold. However, if the stock price drops, I plan to accumulate more shares at specific price points, increasing my position.

Swing Trading Ideas and Market Commentary

Need some new swing ideas? Get free weekly swing ideas and market commentary from Jonathan Bernstein here: Swing Trading.

Explore More

Weekly In-Depth Market Analysis and Actionable Trade Ideas

Get institutional-level analysis and trade ideas to take your trading to the next level, sign up for free and become apart of the community.