June 24, 2024

Could Microsoft Become the First $10 Trillion Company by 2035?

Representative Image(https://unsplash.com/photos/car-parked-in-front-of-building-BhLSBX-0rnM)
Representative Image(https://unsplash.com/photos/car-parked-in-front-of-building-BhLSBX-0rnM)

Microsoft recently hit a new all-time high at the end of May, riding a wave of a broader market rally. This achievement was closely followed by an event on May 20 at Microsoft’s new campus, where the tech giant introduced a range of Windows personal computers (PCs) enhanced with artificial intelligence (AI).

How Could Microsoft’s Copilot + PC Transform Everyday AI?

In its third-quarter fiscal 2024 earnings call, Microsoft announced that its AI assistant, Copilot, is now available on nearly 225 million Windows 10 and Windows 11 PCs—double the number from the previous quarter. Copilot is an AI-powered assistant designed to enhance the functionality of Microsoft 365 apps and more.

Beyond its technological advancements, Microsoft is also committed to rewarding its shareholders. The company pays more in dividends than any other U.S.-based company and spends more on buybacks than on stock-based compensation, reducing its outstanding share count and reversing dilution trends.

If you’re interested in consistent income from your investments, learning how to get dividends from stocks can be a valuable strategy. Microsoft’s strong financial health and strategic initiatives ensure it is well-equipped to invest in long-term growth while providing substantial returns to its investors.

Why Is Microsoft the Ultimate AI Investment?

While Microsoft may not be the purest AI play (a title arguably held by Nvidia), it offers a multilayered AI opportunity by monetizing new technologies across various domains.

In addition to the PC market, Microsoft integrates AI into its Intelligent Cloud business through Azure OpenAI, used by over 65% of Fortune 500 companies.

GitHub Copilot, an AI tool for developers, is growing rapidly. In Q2 fiscal 2024, Microsoft reported a 30% quarter-over-quarter increase in subscribers, reaching 1.3 million. The growth accelerated in Q3, with subscribers increasing by 35% to 1.8 million.

Moreover, Microsoft offers custom AI assistance through Copilot Studio, which saw a 175% quarter-over-quarter increase in adoption, with over 30,000 organizations using the service. Power Platform, another AI tool for businesses, is used by over 330,000 organizations, including more than half of the Fortune 100. Power Apps, leveraging Copilot for app design, grew by over 40% year-over-year, with over 25 million monthly active users.

The key takeaway from recent earnings calls is Microsoft’s rapid monetization of AI across its business. This is not a speculative endeavor; it’s a reality happening now.

How Does Microsoft’s Financial Resilience Support Its Growth?

Microsoft’s broad engagement in cloud computing, enterprise and consumer software, hardware, gaming, and social media provides a diverse customer base. Its greatest advantage is its financial strength, enabling it to invest through economic cycles.

AI and the tech sector will inevitably face downturns. Companies with strong cash flow and balance sheets will emerge stronger from such cycles. Microsoft, with over $80 billion in cash and equivalents and $42.7 billion in long-term debt, is well-positioned to endure downturns.

Microsoft’s revenue, net income, and operating margin are at 10-year highs. It has generated $86.2 billion in trailing-12-month net income, significantly more than the $21.3 billion spent on dividends and $16.8 billion on buybacks. This financial strength allows for aggressive investment in growth, strategic acquisitions, dividend increases, and stock buybacks.

What Path Could Lead Microsoft to a $10 Trillion Market Cap?

In August 2018, Apple became the first U.S.-based company to exceed a $1 trillion market cap. This year, Nvidia has added over $1 trillion in market cap.

Currently, Microsoft holds the highest market cap at $3.2 trillion. The stock has risen over 1,100% in the past 11 years. With compound growth, it doesn’t need such dramatic gains to reach a $10 trillion market cap by 2035.

A 10.9% compound annual growth rate (CAGR) over the next 11 years would suffice. Earnings growth is the most straightforward path. If Microsoft maintains its current price-to-earnings (P/E) ratio, the stock price would increase at the same rate as earnings.

With a current P/E of 37.2, Microsoft would need to grow earnings by 10% for the stock to rise by 10%, or the P/E would need to decrease. However, a 15% earnings CAGR over the next 11 years, coupled with buybacks, seems feasible.

Assuming a P/E of 30 and a 15% earnings CAGR, Microsoft’s earnings per share (EPS) would rise from $11.54 to $54. At a 30 P/E, the stock price would reach $1,620, resulting in a market cap of over $12 trillion.

Even with a reduced P/E, Microsoft could achieve a $10 trillion market cap by 2035 with mid-teens EPS growth. For context, Microsoft’s trailing-12-month EPS increased by 19.2% last year.

Final Thoughts

Microsoft stands out as a prime AI investment, combining a proven track record with significant growth potential. AI is driving margin expansion and sales growth, yet adoption is still in its early stages. Investors should monitor Microsoft’s cloud business growth and the reception of its new AI-powered Copilot + PCs. Strong adoption could accelerate growth beyond expectations.

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