Wall Street has had a monumental year in 2023. Nasdaq CompositeThe tech stock has shrugged off the bear market and soared 43% in 2023. After such a big move, investors are wondering about the possibility of a rebound.
While these concerns are valid, history suggests a different outcome. Going back to 1972, the first year after the market recovery, the Nasdaq averaged a 19% gain, suggesting there is more room for the current market rally. His results ranged from a low 7% increase in 1986 to an even stronger 38% increase in 2013. However, given the improving economy, conditions appear ripe for further upside.
Additionally, recent advances in the field of artificial intelligence (AI), which helped accelerate last year’s economic recovery, are only just beginning to be implemented and could drive trillions of dollars in productivity gains, making this bullish. The market is likely to continue for several years. come. One of the companies at the forefront of this trend is microsoft (MSFT 1.55%). Despite posting a 57% return in 2023, the company could ride these long-term tailwinds to even greater heights.
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potential gold mine
Microsoft was one of the first companies to seize the opportunity presented by generative AI, and Copilot is the most high-profile example of its success. In its simplest form, Copilot is a suite of features deeply integrated with Microsoft’s core products to help users be more productive.
During a recent earnings call, CEO Satya Nadella cited research showing that applying generative AI tools, including Copilot, to specific work tasks can result in “improvements of as much as 70%.” He also noted that overall, Microsoft 365 users were “29% faster at searching, writing, summarizing, and more.” These are just a few of the many applications developed for Copilot, and more are added every day.
The company has made Copilot even more useful by offering out-of-the-box integrations with a wide range of third-party platforms, including: sales force, ServiceNow, Zendesk, etc. By extending Copilot’s capabilities to other platforms, Microsoft is expanding its overall addressable market, which bodes well for the future.
Generative AI is still in its infancy, and it’s nearly impossible to know exactly how valuable this opportunity is for Microsoft, given the rapid and ongoing changes in the landscape, but Wall Street’s efforts nonetheless It hasn’t been stopped. Dan Loeb of the hedge fund Third Point estimates that CoPilot “could add more than $25 billion” to Microsoft’s revenue. [in] In terms of software sales alone, Evercore ISI analyst Kirk Materne suggests that AI could add $100 billion to the company’s revenue by 2027.
Although it may still take years to understand the full scope of this opportunity, it is clear that Microsoft is already benefiting from AI and is poised for even more growth in the future.
Azure continues to gain market share
The demand for AI is rapidly increasing, and the most effective mechanism to deliver these services to the masses will be through the cloud. Amazon Web Services (AWS) has long led the industry it pioneered, but its growth has slowed in recent years, and Microsoft has jumped on the opportunity.
In Microsoft’s fiscal second quarter of 2024 (ending December 31), the company gained market share from competitors for the second consecutive quarter. Azure’s cloud revenue increased 30% year-over-year, which is the same as his AWS alphabetGoogle Cloud grew 13% and 26%, respectively. Microsoft also noted that about 6 percentage points of that growth was due to demand for AI services, up from 3 percentage points in the previous quarter.
This will help explain how Microsoft leverages the advantage of AI to improve financial results.
Not just AI
While AI is clearly the centerpiece, there are other opportunities that could boost Microsoft’s performance. The economic downturn has devastated Microsoft’s personal computing division, which previously generated nearly a third of the company’s revenue. As the PC market begins to recover, the sector’s revenue increased by 19% year-on-year, marking the highest growth rate in nearly three years. The ongoing economic recovery may further support future results.
Despite its growth over the past year or so, Microsoft is still only beginning to take advantage of the opportunities represented by AI. This could help the company grow both its Software-as-a-Service and cloud infrastructure businesses.
But despite these opportunities, Microsoft’s valuation is surprisingly reasonable, trading at 37 times earnings and 13 times sales. This is a small premium to the overall market, but given the wealth of opportunity ahead and Microsoft’s track record of capitalizing on it, it makes sense in this case.
Alphabet executive Suzanne Frye is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Danny Vena has held positions at Alphabet, Amazon, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, Salesforce, and ServiceNow. The Motley Fool has a disclosure policy.
