Microsoft Stock Analysis: AI Is the Secret Sauce That Will Drive MSFT Higher

  • Microsoft‘s (NASDAQ:MSFT) systematic approach to growing its AI business will likely prove to be very effective, creating a strong, positive catalyst for Microsoft stock.
  • The company looks poised to significantly grow a number of its other businesses.
  • Investors looking for increased exposure to Big Tech should buy MSFT stock. 
Microsoft stock - Microsoft Stock Analysis: AI Is the Secret Sauce That Will Drive MSFT Higher

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Microsoft (NASDAQ:MSFT) is taking a systematic, multifaceted approach to expanding its artificial intelligence (AI) businesses that I believe will prove to be very effective over the longer term. Meanwhile, I expect the company to add other AI services going forward. Finally, I predict the firm will be able to continue to meaningfully increase the revenue that it obtains from many of its other offerings in the medium- to long-term.

Given these points, I believe that investors looking for increased exposure to large, AI-focused names should buy Microsoft stock.

A Repeatable Opportunity

When it comes to AI, Microsoft is creating a web of partnerships and large deals. It is also building the infrastructure needed to expand its AI offerings in many markets over the next one to three years.

On Feb. 1, Microsoft announced a deal with systems integrator Insight. Under the arrangement, Insight will market a number of the tech giant’s cloud offerings and utilize fixed amounts of those products itself.

In a s0mewhat different type of partnership deal, Microsoft and ServiceNow (NYSE:NOW) disclosed on May 1 that they would combine their respective AI offerings –Microsoft Copilot and ServiceNow Now Assist — into a single system for enterprises. However, I’m sure that ServiceNow will market Copilot to its many deep-pocketed customers.

And in a lucrative deal that is likely to be repeated many times over, Microsoft agreed to sell multiple products to Japanese manufacturer Hitachi over three years. As it opens the dor to similar partnerships with other major firms over the long term, Microsoft stock will benefit.

A Systematic, Multi-Faceted Approach to AI Growth

Hitachi reported it would invest $2.1 billion in its generative AI initiatives in fiscal 2024. It’s a good bet Microsoft will receive a huge chunk of those funds. And of course, the software giant will also obtain a large amount of funds from Hitachi in each of the next two years as well.

With many sizeable companies looking to expand their use of AI to become more efficient and analyze data more effectively, Microsoft is likely to make a large number of other similar, very lucrative deals going forward.

Finally, Microsoft is investing a significant amount of money in creating the infrastructure that will allow it to offer its AI solutions in many additional markets. For example, on Jun. 3, the firm disclosed that it would spend $3.2 billion to enhance “its cloud and AI infrastructure in Sweden over two years,” Seeking Alpha reported.

AI to Drive New Revenue Streams

Over time, Microsoft expanded the types of subscription packages that it offered LinkedIn users. Before being acquired by Microsoft, LinkedIn primarily offered subscriptions targeted to recruiters. Now, however, the platform also provides multiple subscriptions for sales professionals and for various types of employees who want to improve their skills as well.

I expect the company, using its connection to ChatGPT and its own AI offerings, to carry out a similar process when it comes to AI. For example, the firm could offer subscriptions to companies that want to use its technology for data mining. It could offer other subscriptions to users who want expert-level answers to questions about certain subjects.

Finally, I believe that Microsoft will continue significantly increasing the revenue that it obtains from several of its other sizeable businesses. As I pointed out in previous columns, the firm is looking to sell its Microsoft 365 software to more customers in emerging markets and to more frontline workers, including warehouse employees and selling professionals.

The latter strategies appear to be working as the firm’s Office 365 Commercial revenue surged 15% versus the same period a year earlier. As the company continues to execute on its strategy, I expect that trend to stay intact going forward.

Finally, Microsoft has been gaining internet search share from Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) in recent months, and the software giant’s revenue from LinkedIn rose a hefty 9% year-over-year in its Q2 that terminated at the end of 2023. The incorporation of AI into the professional-market website could enable its growth to accelerate in the medium-to-long term.

On the date of publication, Larry Ramer’s wife held a long position in NOW. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been SMCI, INTC, and MGM. You can reach him on Stocktwits at @larryramer.

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