Microsoft Corp (MSFT US) $US454.46

Enterprise software juggernaut Microsoft (MSFT US), has enjoyed solid but not spectacular performance over the past year, up by 22%. There have certainly been bigger winners, with NVIDIA (NVDA US) +165% a clear and well-documented AI standout. However, MSFT is highly likely to be a big winner from the AI ‘super cycle’ over the coming years in many different areas of their business and is diversified enough not to simply rely on one aspect working.  The company has invested billions of dollars in OpenAI for its ChatGPT AI platform and now Microsoft’s AI business is projected to surpass a $10 billion annual revenue run rate in FY25 Q2, making it the fastest-growing segment in the company’s history.

• As the CEO recently said “This next generation of AI will reshape every software category and every business, including our own”. Microsoft has been at the forefront of huge tech change for nearly 50 years, but arguably, AI will be the most significant. A huge call considering the internet didn’t exist back then!

When we contemplate what the path forward for AI will be, clearly there are many variables, but what we can say with a degree of confidence is that Microsoft will be at the forefront. It may not deliver NVIDIA type returns, but they remain pivotal in the digital transformation wave and, particularly the widespread enterprise shift to cloud computing as an enabler of broader AI adoption.

• On a PE of 32x, Microsoft is not inexpensive, but it’s not expensive either. From a huge and diversified earnings base, MSFT will likely generate earnings growth of at least 15% pa for the next 3-years, with the risk more on the upside in our view.

We continue to believe that Microsoft is a must-own stock that balances the risks associated with massive digital transformation with the opportunities that will emerge.