Microsoft (NASDAQ:MSFT) stock is definitely a prime example of the power of cloud computing. The development of this technology has transformed the company. But Wall Street can easily get too excited — and are we seeing that with MSFT stock?
Let’s face it, the MSFT stock price is far from cheap at current levels. Note that the forward price-to-earnings ratio is at 23 and the dividend is at a mere 1.5%. By comparison, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) is trading at 22 times and Facebook (NASDAQ:FB) is at 19 times.
Then again, MSFT stock certainly deserves a premium. And besides, the cloud opportunity is still in the early innings. According to data from Gartner, the spending is expected to jump from $214.3 billion this year to $331.2 billion by 2022.
As for Microsoft, the company is positioned nicely to get an outsized portion of the opportunity. The company has inherent advantages like a trusted brand, a massive base of corporate customers, a global infrastructure and a strong ecosystem of developers.
Keep in mind that — for the past year — MSFT posted revenues of $38 billion for the commercial cloud business, with margins rising to 63%. Currently, the company is No. 2 in terms of cloud market share, only behind Amazon (NASDAQ:AMZN).
The cloud essentially pervades the whole organization. At the core of this is the Azure platform, which is a powerful hosting system. In the most recent quarter, the growth came to a sizzling 63% (the company currently does not disclose the revenue amount).
But of course, MSFT has been investing aggressively to retool its existing franchises for the cloud, such as Office, Windows and its server business. Oh, and then there is LinkedIn, which is the largest professional network with 645 million members.
There’s Artificial Intelligence, Too
When it comes to MSFT stock, the cloud is not the only mega catalyst. Artificial intelligence is also one. Interestingly enough, it may ultimately be bigger than the cloud as AI technology has the potential to provide tremendous insights for businesses and allow for much more extensive automation.
Note that MSFT has a long history with AI. And yes, the company has been infusing the technology across its platforms. For example, Azure has a set of sophisticated tools for deep learning, machine learning, computer vision and so on. Then there is the continued innovation with Office 365, which has capabilities for language translation, predictions and analytics. Even Microsoft’s Dynamics 365 CRM is getting traction because of AI.
Microsoft is also making some bold venture investments in the industry. The most notable is a $1 billion equity stake in OpenAI. The company is one of a handful of startups that is focused on artificial general intelligence (AGI), which is the Holy Grail of AI. In other words, it’s about building machines that have human qualities like understanding, judgement and reason.
The acquisition of GitHub will also likely play a major role in the AI effort. This is the largest community for developers to share code (there are 36 million developers). That is, MSFT will be at the core of many innovations and breakthroughs.
Bottom Line On MSFT Stock
When it comes to a tech company, usually there is a focus on a singular major opportunity. But MSFT is different. It’s focused on perhaps the two biggest trends in tech — which will last for many years to come. More importantly, the company is ideally capable to capitalize on them, as it continues to generate huge amounts of cash flows.
So when it comes to making bets on where technology is going, MSFT stock is certainly a great option.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.