Microsoft (MSFT) continues to be among the big winners from the artificial intelligence (AI) boom, as its Azure cloud infrastructure unit is growing very rapidly as a result of the proliferation of AI. Based on a note recently issued by French investment bank BNP Paribas, it appears Azure's growth is well positioned to significantly accelerate in the medium to long term, providing MSFT stock with a powerful, positive catalyst.
With the tech giant also posting strong overall financial results and changing hands at an attractive valuation, I continue to recommend that investors looking for increased exposure to Big Tech consider buying Microsoft stock.
Microsoft and the AI Revolution
Powered to a large extent by the growth of AI, Azure is expanding very rapidly. Azure's revenue rose 43% during the company's fiscal fourth quarter that ended on June 30, versus the same period a year earlier. Further, the unit generated more than $100 billion of annual revenue during its full fiscal year.
Also noteworthy is that the Intelligent Cloud division, which includes Azure, generated operating income of $15.95 billion in Q4 versus $12.14 billion during the same period a year earlier.
And in another encouraging sign for the company's AI business, MSFT reported that the paid user base of Copilot, the firm's AI assistant, exceeded 30 million, “with net seat adds more than doubling quarter over quarter.” The latter metric suggests that my previous bullishness about the tool's new features may have been justified. Moreover, Copilot could soon start generating real, needle-moving revenue for Microsoft.
Likely Upcoming, Positive Catalysts
Following a meeting with Microsoft executives, BNP Paribas analyst Stefan Slowinski reported that the firm intends to raise the prices of Azure's offerings after the unit's existing contracts end. What's more, Slowinski indicated very little of Azure's growth last quarter was generated by price increases, and the company suggested that its deals with OpenAI were not the reason Azure's revenue growth surpassed expectations last quarter.
In light of these points, it looks likely that Azure's revenue growth will accelerate meaningfully in the medium to long term as more price hikes kick in and as OpenAI purchases more offerings from Azure.
MSFT's Excellent Overall Results and Its Attractive Valuation
In its Q4, the firm's overall revenue surged 18% versus the same period a year earlier, while its operating income also climbed 18% year over year. Most impressively, its commercial remaining performance obligations, which are similar to backlog, soared 84% year over year.
Despite these impressive growth metrics, the company's high leverage to the AI boom and its powerful upcoming catalysts have the shares changing hands at a relatively low forward price-to-earnings ratio of 25 times.
On the date of publication, Larry Ramer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.