Microsoft (NASDAQ:MSFT) stock has been very quick to recover from the brutal bear market of 2022. Year-to-date, MSFT stock is up around 30%, thanks in part to its role (perhaps lead) in the artificial intelligence (AI) race. Undoubtedly, a lot of the gains seem due to excitement over the company’s AI capabilities.
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After its latest leg higher, the stock trades at just shy of 34 times trailing price-to-earnings (P/E). That’s on the high side of its historical range, and though a lot of excited folks may be piling in to get a bit of skin in the AI game, I still don’t view Microsoft as expensive. Despite the now richer price tag, I remain bullish.
The Case for Not Dismissing AI as the Next Bubbly Trend
It may be hard to tell how much of the AI trend is hype and how much will actually change the way things are done. As investors, we’re fresh off of a violent crash in speculative technology stocks. As such, it’s natural to be a bit cautious when approaching a potential investment in a new, emerging technological trend.
Cryptocurrencies, blockchain, NFTs (non-fungible tokens), cutting-edge fintech, and the Metaverse are no longer the hottest of trends. AI has taken center stage, but given last year’s painful punishment for trend-chasing, it remains to be seen how quickly investors will continue piling into the AI trade.
Just like crypto in 2020 or 2021, it’s hard to tune out the AI chatter these days. ChatGPT, Bing, Bard, and similar products are very impressive, and they deserve attention. Personally, I think AI brings a lot more to the table than something like Bitcoin (BTC-USD). And though there may be a lot of AI euphoria in names like Microsoft right now, the stock doesn’t look bubbly in the slightest. The stock’s still down more than 10% from its all-time high, a level I suspect will be tested in just a matter of time.
In addition, AI’s big “prime time” moment feels closer than that of the Metaverse. There’s a reason why the term “AI” was used so heavily at Meta Platforms’ (NASDAQ:META) latest conference call. Though Meta is still committed to the Metaverse, it may be more of a longer-term effort than one that translates into considerable profits over the nearer term.
There’s nothing wrong with pursuing AI and efficiency while keeping metaverse efforts going strong in the background. Meta’s very smart to do so, given recent action in the stock, with shares up more than 86% year-to-date.
Clearly, people are amazed by the capabilities of OpenAI and ChatGPT. That said, the real question is when and in what way advanced AI will become monetizable enough to move the needle higher for a behemoth like Microsoft.
Big Tech’s Commitment to AI Should Not Go Ignored
Given that big-tech companies have committed to spending big on AI in a cost-trimming environment leads me to believe the monetizability of AI technology is real, and there’s a lot at stake in the so-called AI race. The big-tech companies aren’t the kind to chase the hottest bubbly trends. They’re all about leveraging technologies in a way to help them grow over the long run.
We didn’t hear all that much about FAANG companies’ crypto ambitions when blockchain was the talk of the town. The fact that firms like Microsoft and Meta are not shying away from their AI budgets is a sign AI is a trend that’s deserving of the hype. In fact, major progress in AI has been going on behind the scenes of firms well before ChatGPT amazed us all.
Looking ahead, things will get very exciting for the field of AI. Microsoft will be ready to see what the technology is truly capable of. In terms of monetization opportunities, I do believe Microsoft can more than justify the recent run-up in its stock.
Microsoft is Doubling Down on AI
Microsoft already owns a stake in OpenAI, the firm behind ChatGPT. As GPT advances, Microsoft will be doubling down by finetuning AI for a wider range of applications. The company recently released new features on Bing, including saved history and an enhancement of its image creation tool. The pace of upgrades and enhancements is coming in fast.
As Bing picks up in popularity, Microsoft may be able to monetize (think ads) AI in a big way. Undoubtedly, it’s a very exciting time for investors. AI doesn’t promise just growth in the future, though. It can help bring profits sooner than many may expect as efforts accelerate and new features touch down.
Is MSFT Stock a Buy, According to Analysts?
Turning to Wall Street, MSFT stock comes in as a Strong Buy. Out of 34 analyst ratings, there are 29 Buys, four Holds, and one Sell rating.
The average MSFT stock price target is $325.10, implying upside potential of 5.7%. Analyst price targets range from a low of $232 per share to a high of $350 per share.
The Takeaway
AI isn’t just a trendy technology; it’s a powerful one that could change industry dynamics. It’s no wonder why big tech is on high alert over AI. Microsoft stock may skew on the high end of its historical price-to-earnings range, but there’s a good reason why.
