Microsoft Dominates AI-Driven Innovations Sparking Investor Frenzy as Q2 Results Soar

The stock market commenced another round of quarterly earnings reporting, with numerous companies slated to disclose their financial results for December 31, 2023 period. The spotlight is on technology, mainly due to its pivotal role in the ongoing artificial intelligence (AI) revolution. The sector is poised to be a significant source of value in the foreseeable future. Notably, Microsoft is among the few currently monetizing AI software on a large scale. The fiscal results for Microsoft’s second quarter of 2024 (ending December 31) have been disclosed.

The results reveal a remarkable surge in growth within its AI-related segments. Microsoft (NASDAQ: MSFT) stands out as a crucial AI player. Having invested $10 billion in the OpenAI-developed ChatGPT last year, Microsoft has seamlessly integrated the startup’s technology across its entire product portfolio. Looking back in five years, investors may regret not investing in Microsoft stock. Here’s the rationale behind it.

Copilot Accelerates

Over the past year, investors predominantly focused on Microsoft’s business-to-business cloud computing platform Azure, where the company deploys AI-as-a-service to a vast customer base. While Azure remains critical, Copilot is gaining significant momentum in Q2 and is also worth exploring.

Microsoft Copilot, a virtual assistant powered by large language models (LLM) and generative AI, can create text, images, videos, and even computer code. Embedded in the Windows operating system, Edge internet browser, Bing search engine, and Office 365 applications, Copilot is proving to be a valuable asset. With over 400 million paid 365 seats, businesses have a substantial financial opportunity to leverage Copilot, which Microsoft reports has accelerated tasks by 29%.

Copilot for the Microsoft Power Platform also enables businesses to develop websites and software applications without coding. In Q2, over 230,000 businesses were utilizing Power, an 80% increase from the previous quarter. The introduction of Copilot Studio, allows businesses to customize Copilot for specific needs, further enhancing productivity. With over 10,000 organizations using Copilot Studio in Q2, its adoption is poised to become essential for every organization.

While Azure continues to drive Microsoft’s revenue growth, the company achieved a record-high revenue of $62 billion in Q2, marking an 18% increase YoY. The Intelligent Cloud segment, with a 20.3% revenue growth to $25.8 billion, was led by Azure, boasting a 30% revenue increase, with AI contributing significantly.

Microsoft’s Strategic Move in the OpenAI Partnership Pays Off

Microsoft delivers OpenAI’s latest GPT-4 models through Azure to its business customers, attracting over 53,000 Azure AI customers in Q2, with one-third being new business customers in the past year. Over half of the Fortune 500 companies are now Azure AI customers.

Despite Microsoft’s relatively high price-to-earnings (P/E) ratio of 36.8, it has earned its premium due to several factors. Azure’s rapid market share growth, especially compared to AWS, positions Microsoft as a formidable competitor. 

Moreover, Microsoft’s extensive user base of Office 365 applications provides a straightforward avenue to monetize AI software without acquiring new customers.

Even with a modest 10% compound annual growth rate in earnings per share over the next five years, Microsoft’s stock could see a 61% upside. Given the company’s impressive 30% earnings growth in the first six months of fiscal 2024, this growth rate appears conservative, emphasizing Microsoft’s potential for substantial financial growth.