Microsoft’s (NASDAQ:MSFT) fiscal fourth-quarter results, unveiled on July 30, showed that the tech giant’s Azure cloud unit continues to expand very quickly. Moreover, the firm is benefiting meaningfully from the AI boom. It should also get a significant lift from the refresh of its operating system that’s currently under way. Finally the firm is well-positioned to benefit from potential acquisitions in the AI and cybersecurity spaces over the longer term.
With the valuation of Microsoft stock reasonably attractive, I believe that conservative investors looking for exposure to Big Tech should buy Microsoft stock.
Strong Cloud Growth and Meaningful AI Benefits
Azure is tremendously benefiting from the AI revolution and the continued transfer of company data to the cloud. Last quarter, the unit’s sales jumped 29% versus the same period a year earlier. Roughly eight percentage points of the increase was attributable to the firm’s sales of AI-linked products, up from seven percentage points during the previous period.
Moreover, CFO Amy Hood expects Azure’s overall growth to accelerate in the second quarter of its fiscal year which kicked off in July. She explained the company’s capital spending will provide it with more AI services that it can sell to meet the growing demand for such offerings.
“Adoption of Microsoft native AI services running on Azure are gaining strength,” Bank of America wrote in the wake of the tech giant’s results.
Meanwhile, 40% of the 8.8 million AI PCs that were shipped last quarter had Microsoft Windows operating systems, according to tech research firm Canalys. For the full year, 44 million AI PCs are expected to be shipped, and Canalys predicts that the total will more than double next year to 103 million. The trend spurred a 9% increase in the overall number of Windows PCs with price tags over $800 last quarter versus Q1, the firm said.
As a result of these developments, the overall revenue generated by the Windows operating system should meaningfully increase. That means Microsoft should be able to generate needle-moving sales by offering AI software and services to the rapidly growing number of consumers and companies with AI PCs.
The Windows Refresh and Potential Acquisitions
Microsoft will end free support for its Windows 10 operating system in October 2025. As a result, many owners of PCs running the software will likely shift to later versions of the operating system, meaningfully boosting the firm’s top and bottom lines. Indeed, HP (NYSE:HPQ) CEO Enrique Lores reported in May that “the upgrade cycle” was creating stronger-than-expected demand for its PCs. The latter trend should accelerate as we get closer to October 2025.
Moreover, some companies may accept Microsoft’s offer to upgrade Windows PCs for $61 per device for the year that ends in October 2026. But, of course, the revenue generated by those payments will also boost Microsoft’s top and bottom lines.
Meanwhile, with interest rates dropping, the company may feel better about making big, significant acquisitions going forward. In particular, I think that the tech giant may look to buy sizable cybersecurity and AI firms. Given continued waves of cyber attacks, the demand for IT security software is still grow rapidly, while firms continue seeking to improve their performances by incorporating more AI applications. AI appears to be especially effective for healthcare firms, so Microsoft could look to buy an AI company that specializes in the healthcare space.
Valuation and the Bottom Line
Microsoft stock has a forward price-to-earnings ratio of 31 times. That’s an attractive valuation, considering that analysts expect its EPS to climb by 11% this year and 16% next year.
Given Microsoft’s huge size and high leverage to the still relatively slow-growing PC market, the company’s growth is not going to set the world on fire. Still, in light of its ability to benefit meaningfully from the AI boom and its reasonable valuation, the shares are attractive for conservative investors looking for more Big Tech exposure.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
