Microsoft (NASDAQ:MSFT) has been among the top growth stocks of the last two years as investors have piled into AI-focused companies.
Even with the gains the stock has seen, though, MSFT may well still have more room to run thanks to its Azure cloud computing segment and the position it has managed to carve out for itself in the field of artificial intelligence.
Here, we take a look at these long-term growth catalysts for Microsoft to see whether the stock Is still be a good long-term buy-and-hold opportunity.
Microsoft’s Growing AI Dominance
The largest long-term growth opportunity for Microsoft at the moment is very likely in the field of AI, where the company has staked out a strong early lead.
At the core of Microsoft’s AI strategy is its deep partnership with OpenAI, giving it access to the startup’s advanced AI models and tools. This has enabled Microsoft to incorporate cutting-edge AI into many of its software products.
Management also plans to invest around $80 billion in AI infrastructure this year, though the real number may prove to be somewhat smaller due to macroeconomic challenges and the ongoing uncertainty introduced by possible tariffs. This investment in building out data centers will likely help to keep Microsoft out in front as one of the top AI providers.
One of the other advantages Microsoft has in the area of AI is its massive existing customer base, giving it a ready-made audience to roll new AI tools out to. Last year, for instance, Microsoft Office eclipsed 400 million users. With so many users, Microsoft can introduce new tools for productivity and generate essentially immediate revenue from them.
Incredibly, AI has even allowed Microsoft to gain a bit of market share in the search engine space. Though Google certainly remains the number one search engine, Bing has managed to grow somewhat thanks to its AI features.
In Q4 of last year, for instance, Microsoft reported a 19% year-over-year growth in search and news revenue. While Microsoft will almost certainly never catch up to Alphabet where search engines are concerned, this is a good illustration of just how comprehensive the growth opportunities from AI are for Microsoft.
Azure’s Continued Contribution to Microsoft
Thanks to the leading spot Microsoft is taking in the AI market, Sundar and team are still chugging ahead with extremely strong momentum in the Azure cloud computing segment.
In the quarter ending on March 31st, for example, the top brass reported a 33% year-over-year increase in Azure revenues. This beat out management’s own guidance and set the stage for expectations of a 34 to 35% revenue increase in the next quarter.
Taking a longer-term view, it seems very likely that Microsoft will keep seeing very strong revenue growth from Azure for many years to come. AI is still in its infancy, and Microsoft is in the unique position of having the resources needed to develop new models, access to OpenAI’s technology and a ready-made customer base for the AI tools it creates.
Over the next five years or so, estimates suggest that AI could contribute over $15 trillion to the global economy. With Microsoft already at the cutting edge of this world, it seems very likely that Microsoft will benefit from this massive surge in AI.
Microsoft’s Long-term Earnings Growth Trajectory and Valuation
Cumulatively, strength in both AI and cloud computing is expected to help Microsoft deliver earnings growth of about 12% annually over the next several years
. Though perhaps not as extreme as other tech companies like NVIDIA, this level of earnings growth is nothing to scoff at. Using the company’s current trailing 12-month earnings of $12.94 per share as a starting point, this would result in EPS of about $22.80 in five years.
Importantly, the improvement and implementation of AI could keep earnings growth high well beyond the 5-year mark, potentially creating the opportunity for substantially higher earnings throughout the 2030s.
Although Microsoft isn’t exactly valued at a bargain price, its shares are fairly reasonable considering its strong moat, growth prospects and excellent profitability.
Shares currently trade at 35.6x trailing earnings, a level that is far from outrageous for a business like Microsoft. In fact, this P/E ratio is more or less in line with the average MSFT has seen since 2020. With MSFT already delivering on the promise of AI, this is likely a rather fair price to pay for Microsoft shares.
Microsoft Stock Outlook
The outlook for Microsoft stock is bullish with upside potential to $509.92 per share according to the consensus among 52 analysts covering it.
By many standards, Microsoft looks like an exceptional business that could be worth investing in. Although the shares probably aren’t actively undervalued, they do appear to represent a fair price for the level of growth Microsoft may very well deliver in the coming years.
Gates’ enterprise is also extremely profitable, having reported a trailing 12-month net margin of 35.8% and a return on invested capital of 28.7%.
Microsoft even has the additional advantage of a fortress balance sheet, giving it the ability to ride out periods of economic uncertainty such as the one the US economy is currently experiencing.
It’s also worth taking into account that Microsoft could become a solid income investment over the next several years. It has been gradually building up its dividend, a trend that has taken hold among a number of mega-cap tech firms with excess cash on their balance sheets.
To-date, shares of MSFT yield 0.7%. The company’s payout ratio of under 25%, though, leaves much more room for continued dividend increases. As such, Microsoft could be a very appealing buy-and-hold option for dividend growth investors.
Between long-term growth catalysts, fair pricing and a business that is already performing extremely well, MSFT looks like it could be a good stock to buy now and hold for the long run. Although AI is still in its early stages, Microsoft appears to have taken an early lead in commercializing the technology and could be one of the best long-term investment plays on the future of artificial intelligence.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.