Microsoft’s AI-driven expansion is anticipated to aid the company’s stock in recovering its momentum following a less-than-stellar performance in 2024. Over the past three years, Microsoft’s shares have achieved a notable 41% increase, slightly surpassing the S&P 500 index’s 34% rise. Despite this, Microsoft’s stock has struggled to gain traction in 2024, recording only an 11% increase and significantly underperforming compared to the S&P 500 index. This underperformance is somewhat unexpected given Microsoft’s consistent quarterly growth. The following analysis explores Microsoft’s potential for the next three years and evaluates the possibility of overcoming its 2024 setbacks to achieve long-term success.
AI presents substantial growth opportunities for Microsoft. In the fiscal year that concluded on June 30, 2024, Microsoft reported a 15% year-over-year revenue increase, reaching $245 billion on a constant-currency basis. This double-digit growth was fueled by a surge in demand for Microsoft 365 office products, a significant rise in Azure revenue, and a 9% increase in search and news-advertising revenue.
The Azure segment was a key driver of Microsoft’s growth, with a 33% year-over-year revenue boost attributed to Azure and other cloud services, including a notable nine percentage points linked to artificial intelligence innovations. AI’s role in Azure’s growth increased throughout the year, moving from a five percentage-point contribution in the first fiscal quarter to eleven percentage points by the fourth quarter.
The demand for cloud-based AI services is escalating rapidly. According to Goldman Sachs, the global cloud computing market could achieve $2 trillion in revenue by 2030, compared to $496 billion in 2023, with generative AI expected to comprise 10% to 15% of global cloud spending by decade-end. Microsoft is already capitalizing on this trend by offering a diverse range of large language models (LLMs) on its cloud platform, enabling customers to develop and deploy AI models. CEO Satya Nadella highlighted that Azure AI is expanding its customer base, reaching over 60,000 Azure AI customers, a growth of nearly 60% year-over-year, alongside increasing average customer spending.
Moreover, Microsoft’s models-as-a-service offering has seen substantial uptake, with the number of paid customers doubling quarter-over-quarter in fiscal Q4. Given the expected rise in demand for AI cloud services in the coming years, Microsoft is poised for further acceleration in Azure revenue. Concurrently, the Office 365 business is benefiting from AI advancements. The number of daily users of Microsoft’s generative AI assistant, Copilot, nearly doubled quarter-over-quarter in fiscal Q4, with customer usage increasing by 60% sequentially. The market for AI-powered productivity tools is projected to grow at an annual rate of about 27% through the end of the decade, potentially reaching $36 billion in annual revenue by then.
New growth opportunities, driven by AI, are expected to support Microsoft’s sustained growth over the next three years, aligning with consensus projections. Analysts forecast that Microsoft’s earnings, which jumped 20% year-over-year in fiscal 2024 to $11.80 per share, will experience a slowdown in the current fiscal year. However, growth is expected to accelerate in fiscal years 2026 and 2027.
The smaller increase in fiscal 2025 earnings is largely due to Microsoft’s substantial capital investments. The company’s capital expenditure increased by 75% last year to $55.7 billion, with plans for further spending in fiscal 2025 focused on enhancing its cloud and AI infrastructure. Despite short-term pressure on the bottom line, Microsoft anticipates that this spending will enable long-term monetization of the growing AI demand.
Looking forward, Microsoft’s earnings growth is projected to pick up pace over the next few years. If earnings reach $17.98 per share in fiscal 2027 and the company trades at a price-to-earnings ratio of 30, consistent with the Nasdaq-100 index, Microsoft’s stock price could climb to $540, a 29% increase from current levels. If Microsoft achieves higher growth and market confidence, it could yield stronger gains over the next three years, making it a valuable addition to investment portfolios despite its underwhelming 2024 performance.
