Microsoft (NASDAQ:MSFT) stock is undoubtedly a prime example of the power of cloud computing. The development of this technology has transformed the company. But Wall Street can easily get overly excited – and are we seeing that with MSFT stocks?
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Let’s face it, MSFT’s stock price is far from cheap at current levels. Note that the forward price/earnings ratio is 23 and the dividend is only 1.5%. By comparing, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) trades at 22x and Facebook (NASDAQ:Facebook) is 19 times.
Then again, MSFT stock certainly deserves a premium. And besides, the cloud opportunity is still in the early innings. According to data from Gartner, spending is expected to grow from $214.3 billion this year to $331.2 billion by 2022.
As for Microsoft, the company is well positioned to get an outsized share of the opportunity. The company has inherent advantages like a trusted brand, massive enterprise customer base, global infrastructure, and strong developer ecosystem.
Keep in mind that for the past year, MSFT reported $38 billion in revenue for the commercial cloud business, with margins reaching 63%. Currently, the company is #2 in cloud market share, just behind Amazon (NASDAQ:AMZN).
The cloud essentially permeates the entire organization. At the heart of this is the Azure platform, which is a powerful hosting system. In the last quarter, growth reached a sizzle of 63% (the company currently does not disclose the amount of revenue).
But of course, MSFT has invested aggressively to retool its existing franchises for the cloud, such as Office, Windows, and its server business. Oh, and then there’s LinkedIn, which is the largest professional network with 645 million members.
There is also artificial intelligence
When it comes to MSFT stocks, the cloud isn’t the only mega enabler. Artificial intelligence is one too. Interestingly, it could ultimately be bigger than the cloud, as AI technology has the potential to deliver massive insights to businesses and enable far greater automation.
Note that MSFT has a long history with AI. And yes, the company has infused the technology into its platforms. For example, Azure has a sophisticated toolset for deep learning, machine learning, computer vision, and more. Then there’s continued innovation with Office 365, which has language translation, predictions, and analytics capabilities. Even Microsoft’s Dynamics 365 CRM is gaining traction with AI.
Microsoft is also making bold investments in the sector. Most notable is a $1 billion stake in Open AI. The company is one of a handful of startups that focus on Artificial General Intelligence (AIG), which is the holy grail of AI. In other words, it’s about building machines that have human qualities like understanding, judgment, and reason.
The acquisition of GitHub will also likely play a major role in the AI effort. It is the largest community of developers to share code (there are 36 million developers). In other words, MSFT will be at the heart of many innovations and breakthroughs.
Conclusion on MSFT shares
When it comes to a technology company, the focus is usually on a singular major opportunity. But MSFT is different. It focuses on perhaps the two biggest trends in technology – which will last for many years to come. More importantly, the business is ideally able to capitalize on this as it continues to generate huge cash flow.
So, when it comes to betting on the evolution of technology, MSFT stock is certainly an excellent option.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he does not hold a position in any of the aforementioned titles.
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