Source: PaxForex Premium Analytics Portal, Fundamental Insight
Microsoft's shares have demonstrated a remarkable 33% year-to-date growth, capturing the attention of investors due to its expanding presence in the realm of artificial intelligence (AI) and its resilience to economic challenges compared to its industry peers. Additionally, Microsoft stands as a major player in the software arena, achieving record-breaking success with renowned brands such as Windows, Office, Azure, and LinkedIn.
Despite its strong performance earlier this year, the tech market has experienced a modest downturn over the past three months, causing Microsoft's stock to dip by 7% since July, aligning with declines seen in competitors like Apple and Amazon. This market adjustment presents an opportune moment to delve deeper into the prospects of a high-growth company like Microsoft and contemplate potential investment.
Here are three key insights that savvy investors should be aware of regarding Microsoft:
- Enormous Earnings Potential in AI
Microsoft gained a significant foothold in the AI market by investing $1 billion in ChatGPT developer OpenAI back in 2019. Subsequently, the tech giant increased its investment substantially, acquiring a 49% stake in the startup. This strategic partnership has provided Microsoft with access to cutting-edge AI technology, enabling the integration of AI-powered features across its entire software portfolio.
In July, Microsoft indicated that investors should anticipate "gradual" revenue growth stemming from its AI offerings in fiscal 2024. However, given the dominance of Microsoft's diverse brand portfolio and the advanced AI capabilities of OpenAI, this projection could potentially underestimate the actual impact and potential of AI-driven revenue growth for the company.
Data from Wedbush analyst Dan Ives indicates a noticeable surge in activity on Microsoft's cloud service, Azure, following the introduction of AI tools. Ives predicts this uptick could lead to a remarkable 25% revenue growth for Azure in the first quarter of 2024. This projection is reasonable, given that Azure already experienced a substantial 19% year-over-year growth in fiscal 2023, which concluded in June. Additionally, Microsoft 365 is set to introduce an AI assistant called CoPilot, available for $30 per month as an add-on to existing subscriptions. Microsoft's strong presence in cloud computing and productivity software positions it well to diversify its AI offerings and capitalize on this flourishing industry.
- Attractive Valuation Relative to Other AI Stocks
While chipmakers like Nvidia and Advanced Micro Devices have garnered attention due to the AI market's growth, their stocks have experienced significant increases of approximately 198% and 59%, respectively, since the beginning of the year. These companies are crucial in AI hardware development. However, these recent surges have led to elevated stock prices. In comparison, Microsoft appears to offer better long-term value. The chart below illustrates the forward price-to-earnings (P/E) ratios of prominent AI players. A P/E ratio below 20 is typically considered undervalued, and Microsoft is closest to that figure. Moreover, Microsoft's substantial investment in OpenAI and its dominance in various market segments suggest similar or even greater earnings potential within the lucrative AI industry. Microsoft's steady stock growth and consistent earnings growth make it a compelling choice, as expected earnings growth may already be factored into the valuations of its peers.
- Reliable Dividend Growth
Microsoft stands out for its consistent dividend growth, boasting 19 consecutive years of increases. The company's dividend has grown from $0.08 in 2003 to $0.68 in 2022, and it recently announced another dividend hike, exceeding 10% to $0.75. Although Microsoft's dividend yield of 0.87% may seem modest compared to leading dividend stocks like Verizon, it surpasses the yields of its tech competitors. Amazon and Alphabet offer no dividends, while Apple's dividend yield is 0.56%. Microsoft's sustained dividend growth underscores management's confidence in its financial outlook, and this, combined with reliable stock appreciation, makes Microsoft an appealing choice for long-term investors.
As long as the price is above 310.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 319.12
- Take Profit 1: 330.00
- Take Profit 2: 340.00
Alternative scenario:
If the level of 310.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 310.00
- Take Profit 1: 300.00
- Take Profit 2: 291.00
