Artificial intelligence (AI) has created a lot of buzz since early last year, and rightfully so. Generative AI, which represents the cutting edge of these next-generation algorithms, can create original content, including text, video, and images, with just a few simple instructions. Perhaps more importantly, these systems can be used to streamline many time-consuming tasks, thereby increasing productivity. The ability to save time and money has many businesses eager to integrate AI into their operations.
Among the biggest winners of the AI revolution thus far is Nvidia. The company's graphics processing units (GPUs) are the gold standard when it comes to AI. However, with Nvidia generating more than 800% gains since early last year, investors are working to uncover the next wave of stocks benefiting from rapid AI adoption. Many believe the next frontier will be software. Generative AI software sales could surge as much as 18,647% to $280 billion by 2032, according to Bloomberg Intelligence.
Nvidia will likely continue to reap the benefits of the seeds it sowed more than a decade ago, but there's another company that has positioned itself to profit as the trend toward AI-enabled software gains steam.
Image source: Getty Images.
Microsoft: Reimagined for the 21st century
Microsoft (MSFT 0.15%) made a name for itself on the back of its Windows personal computer (PC) operating system and Explorer web browser. The company cemented its place in tech history with the release of its Office suite of workplace productivity software.
However, over the past decade, Microsoft has transformed itself and expanded into a number of new markets with the creation of its Teams workplace collaboration software, acquisitions that included Minecraft and Activision Blizzard, and the debut of its "Big Three" cloud infrastructure platform, Azure Cloud.
Microsoft was also among the first to recognize the transformative opportunity represented by generative AI. Its investment and partnership with OpenAI, which began in 2019, gave Microsoft keen insight into the future potential of AI, working on these algorithms in relative obscurity until early last year.
The fruit of this early foray into AI is Microsoft Copilot, the tech giant's suite of AI-powered digital assistants. What began as a single tool to help developers write code has morphed into the foundation of the company's AI strategy.
The flagship version is Copilot for Microsoft 365, which is deeply embedded into Microsoft Office, the company's collection of software-as-a-service (SaaS) offerings. Beyond that, Microsoft has developed a variety of additional Copilots designed for specific occupations, including sales, service, and finance.
Copilot could be a digital goldmine for Microsoft. The majority of companies are paying $30 per user per month for Copilot. For context, the company offers subscription plans that range from $12.50 to $57 per user per month for Microsoft 365, so the addition of Copilot could roughly double the cost of many subscriptions.
Microsoft has thus far been mum about the details, but several analysts have weighed in, suggesting that Copilot could generate incremental revenue of more than $100 billion annually by 2027.
The company is also seeing a boost to its cloud infrastructure services thanks to AI. In the calendar first quarter, Microsoft's Azure Cloud grew 31% year over year, outpacing both Amazon Web Services (AWS) and Alphabet's Google Cloud, which grew 17% and 28%, respectively. Management also revealed that AI services "contributed seven points" to Azure's growth.
In all, Microsoft captured 25% of global cloud infrastructure spending during the quarter, compared to Google Cloud with 10% and AWS with 31%. If the current trend continues, Microsoft could eventually become the leading provider of cloud services, dethroning AWS.
The proof is in the pudding
Microsoft continues to generate remarkable results, particularly for a company its size. For its fiscal third quarter (ended March 31), revenue climbed 17% year over year to $61.9 billion, while diluted earnings per share jumped 20% to $2.94.
Despite the massive opportunity ahead and Microsoft's first-mover advantage, the stock is priced at 37 times forward earnings, which is surprisingly reasonable relative to the massive opportunity.
We're barely a year into the AI revolution, yet the excitement concerning AI is palpable. Microsoft has developed a brilliant strategy to profit from the early stages of AI adoption which is benefiting shareholders along the way. That's why the stock is a buy.
