In the landscape of 2023, Microsoft (MSFT -0.67%) emerges as a resounding victor. With share prices skyrocketing by 35% since January, propelled by the fervor surrounding artificial intelligence and the collaboration with OpenAI’s ChatGPT, Microsoft stands at the forefront of tech excellence.
In light of the recent price retreat, investors might find themselves contemplating whether this is an opportune moment to buy into the momentum before it surges further, or if the winds are shifting, signaling potential decline. However, the market’s capricious nature often defies predictions, particularly in the short term.
Instead, let’s delve into the core of Microsoft’s fundamentals and its valuation to assess the allure of its shares for long-term investors. This journey uncovers a more compelling narrative, so let’s dive in.
AI as a Propellant for Azure: Charting Growth
Artificial intelligence ignited a Wall Street frenzy earlier this year, marked by the meteoric rise of the conversational AI app, ChatGPT. Before Meta Platforms unveiled Threads, ChatGPT held the record as the fastest-growing app in history. Microsoft is a direct beneficiary of this triumph, along with its partner OpenAI, as they have shared a collaborative bond since 2019. Microsoft’s Azure cloud platform serves as the exclusive conduit for all OpenAI endeavors spanning research, products, and APIs. Essentially, Azure forms the bedrock for applications utilizing ChatGPT or other OpenAI innovations. A striking testament to this partnership is ChatGPT’s staggering user base, which currently hovers around 100 million users.
Looking ahead, the prospects remain promising. Research firm Grand View Research forecasts a bright future for AI-related cloud expenditure. The estimate of $45 billion globally in 2022 could burgeon at an average annual rate of 39% throughout the decade. Given Microsoft’s pivotal role as the second-leading cloud platform and its intricate ties to OpenAI, Azure is poised for sustained growth in the coming years.
Infusion of Vitality via Activision Blizzard
Microsoft’s foothold in the gaming realm, fostered through its PC gaming and Xbox console ventures, spans numerous years. Grand View Research forecasts the gaming industry’s potential to burgeon beyond $500 billion by 2030, translating to a 10% growth rate over the decade’s remainder. Despite these promising prospects, Microsoft’s gaming revenue recorded a mere 1% uptick year over year in the quarter concluding on June 30.
To invigorate its gaming sector, Microsoft orchestrated a strategic move to acquire the game studio conglomerate, Activision Blizzard, for a staggering $69 billion. The acquisition has navigated the labyrinth of regulatory approvals since early last year, with only a few countries remaining to endorse the deal.
The assimilation of Activision Blizzard grants Microsoft ownership of illustrious gaming franchises like Call of Duty and World of Warcraft. This windfall of intellectual property is anticipated to ripple through various facets of Microsoft’s gaming domain, catalyzing Xbox and PC sales, in addition to bolstering the Xbox Game Pass game streaming service.
Crunching Numbers: Forecasting Growth and Investment Prospects
While the trajectory of these potential catalysts remains uncertain, analysts radiate optimism concerning Microsoft’s future. The company is poised to achieve a noteworthy growth in earnings per share (EPS), projecting an annual increment of over 12% for the next three to five years.
Examining the stock’s landscape, it bears a forward price-to-earnings ratio (P/E) of 29, which commands a premium over the market average. This premium, however, might be warranted. Microsoft’s growth outlook surpasses historical market norms. Moreover, Microsoft proudly boasts a AAA credit rating from Standard & Poor’s, a distinction shared with only one other public company. This translates to above-market growth from a secure investment that promotes tranquility.
Yet, the pursuit of quality often comes at a cost, and Microsoft’s valuation could potentially temper immediate investment returns in the face of amplified market volatility. A judicious approach is warranted, suggesting an incremental acquisition strategy—initially securing a modest position and gradually expanding it over time, while remaining vigilant for opportune moments to augment holdings. For investors with a long-term horizon spanning at least five years, a degree of flexibility is afforded.
Conclusion: Balancing Prospects and Prudence
From its remarkable journey through 2023 to the anticipation of future growth catalysts, Microsoft casts a spell of allure upon the investment landscape. As the digitized realm continues its evolution and regulatory frameworks take shape, the trajectory of Microsoft’s value embarks on a captivating narrative. While the enigma of achieving $100,000 in valuation lingers, the enduring essence lies in Microsoft’s capacity to reshape economic paradigms, herald innovation, and transcend conventional norms.
