Microsoft, represented by the ticker symbol MSFT (0.70%), is a significant player in the field of artificial intelligence (AI). However, Microsoft doesn’t possess a top-tier AI model. Instead, it tends to act as a facilitator rather than an active competitor in the AI race. Although they have substantial partnerships with OpenAI due to their investment, this relationship has recently grown more complex.
Is Microsoft, being a key player in AI technology, a good choice for investing in AI stocks currently? Are there possibly other superior options available?
Microsoft’s best unit is its cloud division
Microsoft organizes its operations into three major sectors: Productivity and Business Solutions, Cloud Intelligence, and More Personal Computing. The first sector, Productivity and Business Solutions, is what typically comes to mind when considering Microsoft in a conventional sense. It encompasses services such as Microsoft 365, LinkedIn, and Microsoft Dynamics. While not particularly thrilling, this division consistently generates modest, double-digit growth in revenue each quarter.
As a tech enthusiast, I’m all about diving deep into the world of Personal Computing at Microsoft. This realm encompasses hardware giants like Xbox and Microsoft-branded laptops and tablets. The appeal can be a roller coaster ride, depending on consumer preferences. Interestingly, it represents roughly half the size of the other two divisions, which means its impact on Microsoft’s broader financial landscape is somewhat subdued.
The main reason investors are enthusiastic about Microsoft lies in its latest division, Intelligent Cloud. This segment encompasses all their cloud services, with Azure being a significant part, and it serves as a major driver of growth for the company. In the third quarter of FY 2025 (ending March 31), the revenue from Intelligent Cloud grew by 21% compared to the previous year, primarily due to the surge in Azure’s growth at 33%.
In the realm of cloud computing, Microsoft Azure has risen to become one of the leading choices, surpassing Alphabet’s Google Cloud in size and expansion rate, and is now closing the gap with Amazon Web Services (AWS), which is expanding at a slower pace. The collaboration between Microsoft and OpenAI, with ChatGPT being seen as the top large language model currently, has enabled it to claim a significant portion of new AI tasks. Additionally, it provides other top-tier AIs like Llama from Meta Platforms and Grok from xAI.
Is Azure, Microsoft’s platform, emerging as an ideal environment for developers to create AI solutions, and should this prompt investors to consider purchasing stocks of leading AI companies at present?
Microsoft’s stock falls a bit short in comparison to its big-tech peers
In the third quarter of fiscal year 2025 (ending on March 31), Microsoft experienced a 13% increase in revenue and a 18% growth in diluted earnings per share. Given its large scale, these are impressive figures. This strong performance is likely to make Microsoft’s stock more valuable compared to the broader market, as indicated by the S&P 500 index.
This is true, as Microsoft’s stock trades for 33 times forward earnings.
Instead of considering the market’s multiple of 23.7 times forward earnings as a small price, one might wonder if this substantial premium is worth the cost. Is it excessive?
Among Microsoft’s competitors like Amazon, Nvidia, and Facebook’s parent company Meta Platforms, all trade within the same price bracket. This suggests that when evaluating whether Microsoft qualifies as a leading AI stock to invest in, it is prudent to compare these similar companies.
| Company | Forward P/E | YOY Revenue Growth | YOY Diluted EPS Growth |
|---|---|---|---|
| Microsoft | 33.3 | 13.3% | 17.8% |
| Nvidia | 38.4 | 69.2% | 26.7% |
| Amazon | 36.2 | 8.6% | 62.2% |
| Meta Platforms | 28.0 | 15.9% | 36.5% |
Looking at the current perspective, Microsoft’s diluted EPS growth is relatively low among its competitors, even though it shares a similar valuation. This suggests that Microsoft’s stocks might be overpriced compared to other companies in the same sector, and therefore may not be the best AI stock to invest in at this moment.
I must say, Microsoft’s AI game is truly impressive! It’s definitely got the potential to stand the test of time and shine brightly in the AI sector. But remember, there might be other exceptional AI stocks out there that are just waiting to be snapped up!
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2025-07-17 17:32