The past year was a solid one for Microsoft (MSFT 0.84%) investors, as shares of the technology giant gained an impressive 63%, handsomely beating the S&P 500 index's comparable gains of 28%. The gains were driven by its better-than-expected results in recent quarters and the acceleration in the company's business thanks to artificial intelligence (AI).
But what if you're one of those investors who don't have Microsoft stock in their portfolios yet? Are all the gains already priced in for this tech stock giant?
Microsoft is primed to deliver stronger growth going forward
Microsoft's revenue in the first six months of fiscal 2024 (which ended on Dec. 31) increased 15% year over year to $118.5 billion. Meanwhile, its adjusted earnings over that time jumped 30% to $5.92 per share.
The company's performance so far in the current fiscal year indicates that it is on track to grow at a much faster pace than fiscal 2023, when its annual revenue increased 7% to $212 billion and non-GAAP (generally accepted accounting principles) earnings increased by a similar magnitude to $9.81 per share. Microsoft anticipates its fiscal Q3 revenue will land between $60 billion and $61 billion. That points toward a 14% year-over-year increase at the midpoint, suggesting that the company's stronger pace of growth is here to stay.
Analysts expect the company to finish the fiscal year at the end of June with a 15% jump in annual revenue to $244 billion. Microsoft's earnings, meanwhile, are expected to increase 19% to $11.66 per share. It is not that difficult to see why the company is now clocking faster growth.
The adoption of AI is having a positive impact on key Microsoft products. The company's Azure cloud business, for instance, is gaining market share thanks to a variety of AI training and inference tools that Microsoft is providing on the platform. On its January earnings conference call, Microsoft CEO Satya Nadella remarked that the Azure AI platform now has more than 53,000 customers. More than a third of those customers are new ones, having joined the Microsoft Azure AI ecosystem over the past year.
More specifically, Microsoft's cloud business received a boost of six percentage points thanks to AI services. It is also worth noting that its Azure cloud services revenue increased 30% year over year, outpacing Amazon Web Services' 20% growth and Alphabet's Google Cloud's 26% year-over-year jump in the previous quarter.
The global cloud computing market is expected to generate $2.4 trillion in revenue by 2030, as compared to $569 billion in 2022. So Microsoft's improving share of this market bodes well for the company from a long-term perspective. However, this is not the only area where AI could drive solid growth for Microsoft. It is integrating generative AI tools into its productivity apps as well.
Users and businesses can purchase subscriptions for using Microsoft's Copilot generative AI app to create images, summarize documents, and use AI in popular applications such as Word, Excel, Outlook, and PowerPoint. With the demand for cloud-based office productivity software predicted to increase at an annual rate of 25% through 2030, generating an annual revenue of $128 billion at the end of the forecast period, Microsoft is making the right move by integrating AI into its productivity tools.
Microsoft is the second-largest player in the office productivity market, with a share of 30%. The company points out that customers using the AI Copilot in Microsoft 365 "were 29% faster in the series of tasks, like searching, writing, and summarizing." As a result, the likelihood of Microsoft being able to sell more Copilot subscriptions should not be ruled out, and this could help it capitalize on the multibillion-dollar end-market opportunity in this space.
The stock can still deliver robust gains
Thanks to these catalysts, it is not surprising to see why Microsoft's earnings per share (EPS) estimates have been heading higher in recent months.
MSFT EPS Estimates for Current Fiscal Year data by YCharts
As the chart indicates, Microsoft's earnings could increase to $15.65 per share in fiscal 2026. The stock is currently trading at 35 times forward earnings, which is not that expensive when compared to the Nasdaq-100's forward earnings multiple of 31 (using the index as a proxy for tech stocks). Given that AI is accelerating Microsoft's growth, the company could continue commanding a premium earnings multiple in the future as well.
Assuming Microsoft trades at 35 times earnings after three years and generates $15.65 per share in earnings at that time, its stock price could jump to $552. That points toward a 35% gain from current levels. However, if Microsoft can clock higher earnings growth and the market rewards it with a higher valuation because of its AI prospects, this "Magnificent Seven" stock could deliver more upside.
That's why investors who haven't bought Microsoft stock yet could still consider doing so, as it seems built for more upside.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
