In the dynamic landscape of artificial intelligence, OpenAI has made a name for itself as an innovator, particularly with ChatGPT. This AI chatbot, together with other tools like Dall-E and an easy to use API, has done more than just demonstrate OpenAI's technical know-how, but also its ambition to create artificial general intelligence. Within 12 months, the value of the annualized revenue of OpenAI reached $2 billion by December 2023, with demand from business customers increasing significantly and the projections for 2025 showing this figure is set to more than double. Despite OpenAI's many accomplishments, though, its private nature is a challenge for investors wishing to be part of its expansion. There are no openly traded shares to buy, and so a direct investment is not an option for the general public. This is where software giant Microsoft Corp. (MSFT, Financial), which has a visionary stake in OpenAI through its funding, comes in.
An access point to investment
Microsoft's strategic partnership and investment in OpenAI indicates it is the company that will be at the forefront of the AI revolution and makes an interesting investment opportunity. The company began with a $1 billion investment in 2019, followed by an additional $10 billion and, as such, now holds a 49% ownership stake and rights to up to 75% of profits until the time it receives back its investment. The collaboration enables the incorporation of OpenAI technologies into all Microsoft products, which thus far has led to a substantial upsurge in sales.
Analyzing Microsoft's financial fortitude
The financial performance of Microsoft shows the technology giant is not only surviving, but also benefiting from the AI revolution. With the reported increase in revenue to $62 billion in the latest quarter, which represents 18% year-over-year growth, and cloud revenue surging by 24%, Microsoft exhibits a strong financial health and an aggressive pursuit of market share, mainly in the cloud sector.
The successful acquisition of Activision Blizzard for $69 billion, which closed in October 2023, has lifted Microsoft's gaming division and is expected to generate additional revenues, besides giving it a stronger footing in the market. Activision will give the company a strong standing in the mobile gaming segment in which historically it was lagging behind. This step not only provides Microsoft with various revenue sources, but also strengthens its competitiveness in a market worth over $250 billion. As a result of this acquisition, the company is expected to grow its top line by 4.10% ($8.84 billion) in the coming year.
The rapidly growing cloud infrastructure market, which reached over $68 billion worldwide (up 18 % from the previous year), has undergone some dramatic changes. Such growth points to the fifth straight quarter of significant expansion and signifies the sturdy and continuing growth of the cloud sector. Inside this flourishing market, Microsoft Azure has shown remarkable growth and the market share has increased by approximately one point to 23%. This is in contrast to Amazon (AMZN, Financial) Web Services, which has consistently remained about 33%, and Alphabet's (GOOG, Financial) Google Cloud, which has retained its place at 11%. The amounts in terms of revenue are as follows: about $15.6 billion for Microsoft, $22.4 billion for Amazon and $7.4 billion for Google.
It is worth noting competitors are maintaining their market share, which is happening across the board with the revenue pie becoming bigger, meaning even stability translates into significant growth of the overall market. The fact Microsoft's market share increased by 1% to reach 23%, mainly in the period of such growth, shows it is the most bullish of the giants in the tech industry. A key factor of this success has been the company's strategic vision to implement generative AI technologies with the support of its multibillion-dollar investments in OpenAI. Microsoft Azure's incorporation of generative AI in its suite of day-to-day software products is not only riding the wave of cloud infrastructure expansion, but is also designing the future of how businesses and individuals interact with cloud services and AI technologies.
Navigating risks and takeaway
The expected decrease in inflation from 3% to 2.50% this year, as well as a lower probability of a recession, point to a very favorable macroeconomic background for Microsoft. Along with the strategic AI investments and the growth of the cloud infrastructure, the company, in my opinion, is well-positioned for continued growth.
In the coming months, the company is set to launch the Copilot chatbot for its Office 365 platform, which already has a significant user base of 345 million paid subscribers. Microsoft will offer the Copilot subscription for an extra $30 per month in addition to the existing fees. By assuming that 100 million users will subscribe, the company could see its annual revenue growth by at least $36 billion. This increase will represent an approximate 17% growth from the current annual revenue figures of $212 billion.
Microsoft has been beefing up its expenses, particularly with its cloud, AI and gaming platforms, but managed to expand its operating margin to 490 basis points on a year-over-year basis in the second quarter of 2024, registering 43.60%. In view of this, the operating margin for the full year is expected to expand from 42.30% in 2023 to 43.70%, which will directly improve the bottom line.
Investors still have to pay attention to the issues of regulations and the related security risks. The AI market is dependent on ongoing demand, which is also influenced by technological advances, so investors need to balance opportunity with unpredictability.
Microsoft's stock is not a bargain selling at forward price-earnings ratio of 35. In comparison, Alphabet, which is expected to achieve a similar rate of growth in earnings per share over the next three years, trades at a forward price-earnings ratio of 21. The higher valuation of Microsoft could limit its upside potential if Azure's growth suddenly declines.
All in all, I think Microsoft is a company that shares its values with me personally and that is why I am sure of buying the stock. It is not just doing its best, but has grown its business and seems to be getting ahead of the competition in the cloud and AI sectors. The stock could experience some ups and downs in the short term, but should surge over the next couple of years.
