Source: PaxForex Premium Analytics Portal, Fundamental Insight
Microsoft stock has recently provided investors with remarkable returns, gaining 95% since the start of last year. This substantial rise is attributed to the tech giant's accelerated growth, fueled by the increasing adoption of its artificial intelligence (AI) solutions.
The encouraging news is that Microsoft's AI-powered growth is in its early stages, and the widespread adoption of this technology could lead to further impressive increases in revenue and earnings. Let's examine these growth drivers and consider where they might take Microsoft over the next three years.
Microsoft concluded its fiscal 2024 on June 30, with quarterly results set to be released later this month. However, the company's performance in the first nine months and the latest guidance indicate a significant boost in financial performance.
In the first nine months of fiscal 2024, Microsoft generated $180.4 billion in revenue. With a fiscal fourth-quarter guidance of $64 billion, the company is expected to end fiscal 2024 with a top line exceeding $244 billion, a 15% increase over the fiscal 2023 revenue of $212 billion, which had already grown 7% year over year.
Moreover, Microsoft is projected to maintain a robust double-digit revenue growth rate over the next few years. Notably, Microsoft's revenue in fiscal 2021 was $168 billion, and if the company achieves $244 billion in fiscal 2024, it would have experienced a compound annual growth rate (CAGR) of 13% over three years. This indicates stronger growth for fiscal 2024 and beyond.
This growth is driven by the increasing deployment of AI in various applications, including cloud computing, personal computers (PCs), and workplace productivity and collaboration software. The demand for cloud-based AI services is expected to grow by nearly 40% annually through 2030, generating $647 billion in revenue.
Microsoft is already leveraging this trend, with its revenue from the Intelligent Cloud segment rising 21% year over year to $26.7 billion in fiscal Q3. Specifically, the Azure cloud-computing service saw 31% growth compared to the previous year, with AI-related services contributing seven percentage points to this growth.
This isn't surprising as Microsoft is seeing strong demand for its cloud-based Azure OpenAI service. For instance, "more than 65% of the Fortune 500 now use Azure OpenAI service," and customers are increasingly investing in its AI-related cloud offerings. There was an impressive 80% year-over-year increase in the number of Azure deals valued at over $100 million.
This trend is likely to continue, driven by the steady growth of the cloud AI market and Microsoft's efforts to expand its offerings by providing customers with a broader range of large language models (LLMs) and small language models (SLMs) for developing custom AI applications.
The demand for Microsoft's Copilot AI assistant is on the rise, driven by the increasing adoption of AI-enabled workplace productivity software. Microsoft highlights that more than 60% of Fortune 500 companies are now using Copilot. With the workplace collaboration market expected to double by 2027 and generate nearly $72 billion in annual revenue, Microsoft stands to benefit significantly from this growth opportunity.
A similar trend is anticipated in the PC market, where an impressive 500 million AI-enabled laptops are projected to be sold between 2023 and 2027, according to Counterpoint Research. This should bolster sales of Microsoft's Windows licenses over the next three years.
Overall, Microsoft has a strong chance of maintaining its mid-teens revenue growth beyond the next few years. Projections indicate that Microsoft's revenue could reach $322.5 billion after a couple of fiscal years. Assuming a further 15% increase in fiscal 2027, in line with expected growth rates, its revenue could hit $371 billion in three years.
Microsoft's five-year average price-to-sales multiple is 11. If the company trades at this multiple, which is lower than its current sales multiple of 14, its market cap could reach $4 trillion after three fiscal years. This would represent a 15% increase from current levels. However, if Microsoft achieves stronger growth driven by AI and the market continues to value it at a higher sales multiple, the stock could see even greater gains.
Given these prospects, investors who currently hold Microsoft stock might want to continue holding, as the company appears poised for further growth, driven by its expanding AI capabilities.
As long as the price is above 450.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 465.89
- Take Profit 1: 475.00
- Take Profit 2: 485.00
Alternative scenario:
If the level of 450.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 450.00
- Take Profit 1: 440.00
- Take Profit 2: 430.00
