The launch of Copilot+ PC furthers Microsoft's fiery growth story.
microsoft (MSFT 0.74%) hit a new all-time high on Tuesday along with a broader market rally. A few days earlier, during an event at Microsoft's new campus on May 20, the tech giant unveiled a line of Windows personal computers (PCs) designed for artificial intelligence (AI).
Dubbed Copilot + PC, the product offering includes Microsoft Surface and manufacturing partners Acer, ASUS, Dell Technologies, horsepower, lenovoand Samsung with prices starting at $999 and availability starting June 18.
Here's what Copilot + PC adds to Microsoft's already strong investment thesis and why growth stock has what it takes to reach a market capitalization of $10 trillion by 2035.
Image source: Getty Images.
The next step for everyday AI
In its fiscal 2024 third-quarter earnings call, Microsoft said Copilot on Windows is now available on nearly 225 million PCs running Windows 10 and Windows 11, double the number from the previous quarter. Copilot is Microsoft's AI-powered chatbot assistant for Microsoft 365 apps and more. According to the May 20 press release:
Copilot+ PCs are the fastest, smartest Windows PCs ever built. With powerful new silicon capable of an incredible 40+ TOPS (trillion operations per second), all-day battery life, and access to the most advanced AI models, Copilot+ PCs will let you do things you can't do on any other PC. Easily find and remember what you've seen on your PC with Recall, generate and refine AI images in near real-time right on the device using Cocreator, and overcome language barriers with Live Captions, translating audio from over 40 languages โโinto English .
Building PCs with AI in mind is a boon for the industry because it supports demand for AI-powered chips, can increase user productivity, and creates opportunities for developers and consumer electronics companies. In its recent earnings call, Microsoft said it offers a diverse set of AI accelerators made by NVIDIA, Advanced Micro Devicesand its own "own silicon".
A big test for the AI โโgrowth narrative is adoption. If consumers adopt these latest AI-centric products, it will validate that AI is not a fad but the next information revolution.
The ultimate AI game
Microsoft may not be the purest AI game out there (Nvidia would take the title in my opinion). However, Microsoft is arguably the most multi-layered AI opportunity because it is monetizing new technology in so many ways.
In addition to the PC market, Microsoft has integrated AI into its Intelligent Cloud business through Azure OpenAI, which is used by more than 65% of Fortune 500 companies.
GitHub Copilot continues to grow at a dizzying pace. Two quarters ago, in the second quarter of fiscal 2024, Microsoft reported a 30% quarter-over-quarter increase in subscribers, bringing the total number of paid subscribers to 1.3 million. Yet somehow, it posted even faster growth in the third quarter, increasing paid subscribers to 1.8 million, an increase of 35%.
Microsoft also offers custom AI support with Copilot Studio. It reported a 175% quarter-on-quarter increase in Copilot Studio adoption, bringing the total number of organizations using the service to more than 30,000. Power Platform is a similar tool for businesses to build AI-powered applications. In the latest quarter, Microsoft said that more than 330,000 organizations, including more than half of the Fortune 100 companies, use Power Platform. Power Apps, which uses Copilot to help users write code for app designs, grew more than 40% year over year to more than 25 million monthly active users.
The key takeaway from the latest earnings calls is that Microsoft is rapidly monetizing AI across its business. This is not a fantastic idea; is developing, implementing and marketing solutions right now.
The power of deep pockets
Spanning cloud computing, enterprise and consumer software and hardware, gaming, social media, and more, Microsoft has a wide range of touchpoints to engage with a variety of customers. In addition to its industry-leading position in many end markets, the company's biggest advantage is its margin for error.
AI and the technology sector in general will end up suffering a cyclical slowdown. When that happens, companies with cash flow and balance sheets investing throughout the cycle will come out stronger. No company is better positioned to withstand a crisis and likely benefit from it than Microsoft.
It ended the latest quarter with just over $80 billion in cash, cash equivalents and short-term investments on the balance sheet, compared to $42.7 billion in long-term debt.
Its revenue, net income, and operating margin are at 10-year highs. It has generated $86.2 billion in net income in the trailing 12 months (TTM), which is more than double the $21.3 billion it has spent on dividends and the $16.8 billion spent on buybacks. The company has the means to invest aggressively in organic growth, make strategic acquisitions, increase the dividend and repurchase its shares.
Microsoft pays more dividends than any other US-based company. and it's spending more on buybacks than it pays on stock-based compensation. It is now reducing its number of shares outstanding, reversing a trend of dilution due to stock-based compensation. Microsoft is at the top of its game. But it also has what it takes to withstand a crisis while rewarding shareholders through buybacks and dividends and investing in its long-term growth.
The road to 10 trillion dollars
In August 2018, Apple became the first US-based company to surpass $1 trillion in market capitalization, a feat that previously seemed impossible. However, Nvidia has gained more than $1 trillion in market capitalization this year alone.
With a market capitalization of $3.2 trillion, Microsoft is currently the most valuable company in the world. The stock is up more than 1,100% in the last 11 years. Thanks to the power of compound growth, you won't need anything close to that gain to reach a market cap of $10 trillion by 2035.
Microsoft's market capitalization only needs to grow at a compound annual growth rate of 10.9% over the next 11 years to reach a market capitalization of $10 trillion. There are a few ways this could happen.
The first and simplest is earnings growth. If Microsoft keeps the same price-earnings ratio (P/E)The stock price would hypothetically increase at the same rate as earnings.
Microsoft's current P/E is 37.2. If they increase earnings by 10%, the stock will have to rise 10% or the P/E will fall. Now, I would say that Microsoft will be able to grow earnings per share (EPS) at a CAGR of over 15% over the next 11 years, especially when you factor in buybacks. However, it could also see a drop in valuation if growth and investor optimism begin to cool.
Assuming a P/E of 30 and a 15% earnings CAGR over the next 11 years, Microsoft would grow EPS from $11.54 to $54. If a P/E of 30 is applied to that figure, the stock price would be $1,620, giving Microsoft a market capitalization of just over $12 trillion.
Therefore, even if Microsoft's P/E drops, it could still reach $10 trillion by 2035 if it grows annual EPS at a low to medium rate. For context, Microsoft's TTM EPS increased 19.2% over the past year.
Microsoft is worth buying and keeping
Microsoft is the best all-around AI play to buy now because it combines proven track record, size, and growth. AI is driving margin expansion and driving sales growth for Microsoft. However, AI adoption is still in the early stages.
Investors should pay close attention to Microsoft's continued growth in its cloud business and how consumers and businesses receive its new AI-powered Copilot+ PCs. If adoption is strong, Microsoft could enjoy even faster growth than anticipated.
Add it all up and Microsoft is a potential medium to high risk reward opportunity with the highest probability of being the most valuable company in the world by 2035.
