Microsoft France headquarters by JeanLuclchard via Shutterstock
Wedbush analyst Dan Ives, a seasoned tech expert, has been quite vocal about his optimism around artificial intelligence (AI). While his liking for Nvidia (NVDA) is well known, it is not the only AI bet that Ives is bullish about. Microsoft (MSFT), the Windows maker, is also one of his preferred mega-cap tech stocks.
In fact, in a recent note to his clients, Ives stated that, “We believe both Nvidia and Microsoft will hit the $4 trillion market cap club this summer and then over the next 18 months the focus will be on the $5 trillion club, as this tech bull market is still early being led by the AI Revolution.”
Even after the severe selloff in tech stocks in April, shares of Microsoft are up 17% on a YTD basis. And with a market cap of $3.69 trillion, it is the second-most valuable company in the world, jostling for the pole position with Nvidia.
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Skeptics may point toward Microsoft’s rich valuations and make a case for not investing in the stock. This is fair, as the stock is trading at a forward price-earnings ratio of 37x, much higher than the sector median of 23.69x. However, there are good reasons why Microsoft commands a premium valuation in the market and why it is the second-most valuable company in the world.
Over the past 10 years, Microsoft’s market cap has galloped from $354.4 billion to $3.69 trillion currently, a jump of more than 10x.
Moreover, Microsoft has been a consistent outperformer in terms of its quarterly financials.
Microsoft reported total revenues of $70.1 billion for the latest period, marking a 13.3% improvement over the same quarter last year. Meanwhile, earnings advanced by 17.7%, reaching $3.46 per share and surpassing consensus forecasts, which had anticipated $3.22 per share. The key driver behind this strong top-line expansion was the company’s services segment, which saw revenues climb from $44.8 billion a year earlier to $54.7 billion in the current quarter.
Operating cash flow also exhibited robust momentum, rising to $37 billion from approximately $32 billion in the previous year. Overall, Microsoft concluded the quarter with a healthy cash reserve of $28.8 billion and no outstanding short-term borrowings, underscoring its solid financial position.
As reflected in my previous analysis, Microsoft’s integration of AI across its suite of offerings and its position as one of the leading cloud players globally is going to bring significant growth to the company in the coming years. Since then, the stock is up about 10%, and I believe the runway for further appreciation remains.
In this context, Microsoft’s introduction of the Mu language model, coupled with its ambition to transform Windows into a platform inherently optimized for AI, marks a significant step forward in its AI strategy. Mu is a lightweight, purpose-built model engineered to operate directly on neural processing units (NPUs), which are specialized chips designed to handle AI inference tasks such as voice processing and image recognition. What sets Mu apart is its ability to perform functions like summarizing text or answering questions from local files with minimal delay, all without needing to send data to external servers. This ensures user privacy is maintained since everything runs natively on the device.
Moreover, Microsoft is expanding Mu’s reach by enabling it not only on Qualcomm-based (QCOM) machines, but also on systems powered by Advanced Micro Devices (AMD)and Intel (INTC) NPUs. This move reflects a broader push to standardize AI capabilities across diverse hardware platforms within the Windows ecosystem. A critical component of this long-term strategy is the Model Context Protocol (MCP), which Microsoft envisions as an equivalent to USB, but for AI models. By allowing developers to interact with the operating system through a secure, virtualized environment, MCP will make it easier to deploy AI applications safely and reliably while maintaining strict privacy and security boundaries.
Meanwhile, Microsoft Azure remains a formidable force in the cloud computing market, ranking just behind Amazon Web Services. As of the fourth quarter of 2024, Azure held a 21% market share, underscoring its rapid growth and expanding footprint.
Analysts have given MSFT stock a consensus rating of “Strong Buy” with a mean target price of $522.81, which denotes upside potential of about 6% from current levels. Out of 46 analysts covering the stock, 37 have a “Strong Buy” rating, five have a “Moderate Buy” rating, and four have a “Hold” rating.
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On the date of publication, Pathikrit Bose 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. This article was originally published on Barchart.com
