Microsoft (NASDAQ:MSFT) has been a global tech leader for the past few decades. As of August 2024, Microsoft trails only Apple (NASDAQ:AAPL) as the largest company in the world. Though many are calling AI just hype, Microsoft dominates the industry and its rise is backed up by impressive earnings resulting from it. I expect Microsoft to continue providing market-beating returns for the foreseeable future while this temporary dip post-earnings is just another buying opportunity.
Microsoft is Leading the Way in the AI Industry
As soon as OpenAI launched its ChatGPT large language model (LLM) in November 2022, Microsoft made its move. After initially investing in OpenAI back in 2019, Microsoft took a 10% stake in the company for full integration into its products and services. One of the more significant integrations is with Microsoft’s Azure Cloud platform. Developers can use the service to add the ChatGPT API to websites and software applications. Microsoft is using its partnership with OpenAI to bolster its Azure platform, which is its largest revenue stream with nearly 40% of the company’s annual revenue.
Azure continues to take market share from Amazon’s (NASDAQ:AMZN) AWS Amazon Web Services segment. It is used by more than 722 million customers including 85% of Fortune 500 companies. Another advantage Microsoft has is its market dominance when it comes to enterprise computing services. Microsoft has integrated Azure’s AI services into the Microsoft 365 platform. In comparison, neither AWS nor Alphabet’s (NASDAQ:GOOG, GOOGL) Gemini can compete with Azure’s enterprise market share.
The Expansion of Microsoft’s Copilot
In addition to the strides it is making in the AI industry, Microsoft has also expanded the integration of Copilot into its services as well. Copilot is Microsoft’s AI-powered chatbot that can be found in Microsoft 365 as well as the Windows operating system. Microsoft is working to integrate Copilot into its computer hardware as well.
Starting in June, Microsoft Surface computers as well as devices from other OEMs like Samsung and Dell (NYSE:DELL) have included a Copilot integration. They have been branded as the “most intelligent Windows PCs ever built” and are sure to bring in additional revenue to Microsoft. By integrating Copilot into the CPU and GPU, the computer can achieve the highest performance from units.
Thus far, Copilot-integrated computers have outperformed Apple’s MacBook Pro laptops and have topped industry standards for artificial intelligence computer processing by 20 times in power and 100 times in efficiency. Experts predict that by 2026, the Copilot hardware segment can bring in at least $10 billion annually. Last fiscal year, the Surface brought in $7 billion, so needless to say, the Copilot devices can represent a major influx of new revenues.
Microsoft Valuation: Paying Up for the Best in Class
Following its post-earnings dip, shares of MSFT trade at 31.5x forward earnings and 12.8x sales. But as they say, you get what you pay for. Microsoft is the best in class when it comes to tech companies and investors will pay a premium for it. While it is high compared to other big tech rivals, its net earnings per share (EPS) are also at historical highs which is impressive for such a large company.
| Stock Symbol | Forward P/E | Price-to-Sales |
| Microsoft | 31.5x | 12.8x |
| Meta Platforms (NASDAQ:META) | 23.4x | 8.6x |
| NVIDIA (NASDAQ:NVDA) | 39.5x | 32.4x |
| Apple | 29.5x | 8.9x |
| Tesla (NASDAQ:TSLA) | 90.9x | 8.1x |
| Amazon (NASDAQ:AMZN) | 38.9x | 3.2x |
| Alphabet | 22.3x | 6.5x |
Free cash flow is another reason why Microsoft reigns supreme. In the most recent quarter, MSFT saw $21 billion in free cash flow which was a 130% sequential increase. Experts agree Microsoft should continue to grow its free cash flow. They recommend it do so by 30% on a trailing 12-month basis.
Buy the Microsoft Dip Hand Over Fist
Despite its behemoth size, Microsoft continues to present itself as a great long-term investment. Its diversification across industries with a multitude of products and services provides Microsoft with a relatively safe floor. Microsoft’s stake in OpenAI and investment in Copilot ensures it will remain at the forefront of the AI industry as it continues to grow.
Although Microsoft stock trades at a premium, it has multiple tailwinds backing a strong financial position. Among them is free cash flow expansion. Use the post-earnings dip in the stock to buy Microsoft hand over fist for the long term.
On the date of publication, Michael Que held a LONG position in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article
