Microsoft (NASDAQ:MSFT) stock has been leading the markets and the Magnificent Seven group higher of late, with shares recently breaking out to hit a new all-time high. Undoubtedly, artificial intelligence (AI) enthusiasm has continued to be a main driver for the enterprise software behemoth. Not only is Microsoft getting investors excited with its take on AI tech, but it also has a pretty compelling business model in place to monetize the technology over the near term.
Indeed, Microsoft 365 Copilot (the firm’s AI assistant) is a technology that can really pay for itself (and then some) as it helps make a broad range of users more productive at their jobs. Indeed, Copilot certainly seems like Clippy (an old-school assistant built by Microsoft) on steroids!
Add Bing AI search and the firm’s significant stake in OpenAI — Microsoft’s stake has been speculated to be worth close to $100 billion, according to a recent Barron’s article — into the equation, and it’s clear that Microsoft seems to be miles ahead of rivals in this so-called AI race. As Microsoft keeps the AI ball rolling, I find it hard to be anything but bullish, even as shares become richer with every upward move. Analysts agree, giving it a Strong Buy rating.
Does AI Alone Warrant the Recent Wave of Multiple Expansion?
Just how much of a premium should the stock be worth? A strong case could be made for an even higher multiple, as many companies (even non-tech firms) aspire to be more like Microsoft to stay competitive in the AI age. Indeed, Microsoft has set a really high bar regarding AI. And it’s a bar that few firms will be able to pass. All considered, AI alone makes Microsoft stock worth a hefty premium to its own historical averages.
At writing, shares of MSFT go for 36.5 times trailing price-to-earnings (P/E) — close to the most expensive they’ve been in recent memory. Over the past five years, Microsoft stock has averaged a multiple closer to 32 times trailing P/E.
OpenAI, the firm behind the hit large language model (LLM) ChatGPT, recently unveiled ChatGPT 4 Turbo alongside a range of incredible new features, including programmable integrations (GPTs), which allows users to tailor their very own version of ChatGPT for specific use cases. Microsoft CEO Satya Nadella also had a chance to take to the stage alongside OpenAI CEO Sam Altman.
With GPT-5 in the works, Microsoft’s stake in OpenAI alone makes the Magnificent Seven giant more than worth an elevated multiple.
Microsoft Has Growth Drivers Beyond AI
It’s not just AI that makes Microsoft stock one of the most compelling of the Magnificent Seven. Aside from AI, Microsoft also has other irons in the fire that could drive long-term growth and justify the stock’s premium valuation. The closure of the Activision Blizzard deal could be a real boon to the firm’s gaming business, Xbox, as it looks to dominate an industry that’s undergone quite a bit of consolidation in recent years. And let’s not forget about Microsoft’s recent move into making its own custom chips.
Microsoft seems to have a front-row seat to growth in gaming, a market that Grand View Research believes could experience a compound annual growth rate of 10.2% between 2022 and 2030. With Activision Blizzard’s assets thrown in, Microsoft’s Xbox Game Pass is a subscription that may stand to become the stickiest entertainment service on the planet. For now, gaming is more of a long-term growth driver for Microsoft. A far timelier needle mover could lie in the company’s foray into custom chips.
Indeed, it seems like everybody wants a piece of the custom chip market. The company recently pulled the curtain on two new chips during its Ignite conference: the Azure Cobalt 100 CPU and the Azure Maia 100 AI accelerator. As Microsoft in-houses its own chips, its margins could stand to receive a nice jolt over time. And if its own chips prove far more capable than that of its rivals? The stock may just be able to command a trailing P/E north of 40 times.
Is MSFT Stock a Buy, According to Analysts?
On TipRanks, MSFT stock comes in as a Strong Buy. Out of 31 analyst ratings, there are 30 Buys and one Hold recommendation. The average Microsoft stock price target is $409.62, implying upside potential of 8.9%. Analyst price targets range from a low of $375.00 per share to a high of $450.00 per share.
The Bottom Line on Microsoft
Microsoft seems to know where the puck is headed next in today’s fast-moving tech scene. As the company continues investing aggressively in its growth drivers (AI, gaming, custom chips, and the cloud), rivals will be eager to chase it down.
Arguably, Microsoft has already built a huge moat to protect its top drivers. And at this pace, count me as unsurprised if Microsoft becomes the world’s largest company (again) at some point over the next year.
Simply put, Microsoft stock still looks like a Strong Buy, even at the new high.
