Since the beginning of last year, artificial intelligence (AI) has been creating a lot of buzz, and rightfully so. At the forefront of these next-generation algorithms, generative AI, can create original content such as text, video, and images with just a few simple instructions. Perhaps more importantly, these systems can be used to streamline many time-consuming tasks and increase productivity. With the time and cost savings, many businesses are eager to integrate AI into their operations.
Some of the biggest winners of the AI revolution so far NVIDIAThe company's graphics processing units (GPUs) are the gold standard when it comes to AI. But with Nvidia up more than 800% since the start of last year, investors are trying to find the next wave of stocks to benefit from AI's rapid adoption. Many believe the next frontier will be software: According to Bloomberg Intelligence, generative AI software sales could grow 18,647% to $280 billion by 2032.
While Nvidia will likely continue to reap the benefits of the seeds it planted more than a decade ago, another company is poised to benefit as the trend toward AI-enabled software accelerates.
Microsoft: Reimagined for the 21st Century
Microsoft (Nasdaq: MSFT) The company built its reputation on the Windows personal computer (PC) operating system and the Explorer web browser. The company cemented its place in technology history with the release of its Office suite of workplace productivity software.
But over the past decade, Microsoft has reinvented itself and expanded into numerous new markets with the development of its Teams workplace collaboration software, acquisitions such as Minecraft and Activision Blizzard, and the debut of its “big three” cloud infrastructure platform, Azure Cloud.
Microsoft was also one of the first companies to recognize the transformative opportunity that generative AI offers. Its investment and partnership with OpenAI beginning in 2019 gave the company keen insight into what AI could be doing in the future, and until early last year, the company had been working on these algorithms in relative obscurity.
The result of this early foray into AI is Microsoft Copilot, the tech giant's suite of AI-powered digital assistants. What started as a single tool to help developers write code has morphed into a cornerstone of the company's AI strategy.
The flagship version is Copilot for Microsoft 365, which is deeply integrated into Microsoft Office, the company's collection of software-as-a-service (SaaS) products. Additionally, Microsoft has developed a range of Copilots designed for specific job roles, such as sales, service and finance.
Copilot could be a digital goldmine for Microsoft. Most businesses pay $30 per user per month for Copilot. By comparison, the company offers subscription plans for Microsoft 365 ranging from $12.50 to $57 per user per month, so adding Copilot could nearly double the cost of many subscriptions.
Microsoft has remained quiet on details for now, but analysts suggest Copilot could generate more than $100 billion in incremental annual revenue by 2027.
The company is also bolstering its cloud infrastructure services with AI. In the first quarter of the calendar year, Microsoft's Azure Cloud grew 31% year over year, Amazon Web services (AWS) and alphabetThe company's Google Cloud grew 17% and 28%, respectively. Management also revealed that AI services “contributed seven percentage points” to Azure's growth.
Overall, Microsoft captured 25% of global cloud infrastructure spending during the quarter, compared to 10% for Google Cloud and 31% for AWS. If current trends continue, Microsoft could eventually overtake AWS to become the leading provider of cloud services.
The proof is in the results
Microsoft continues to deliver impressive results, especially for a company of its size: In the third quarter (ended March 31), revenue increased 17% year over year to $61.9 billion, and diluted earnings per share increased 20% to $2.94.
Despite the huge opportunity ahead and Microsoft's first-mover advantage, the company's stock is traded at 37 times forward earnings, a surprisingly reasonable price given the large opportunity.
The AI revolution is only a year old, but the promise is clear. Microsoft has developed a good strategy to capitalize on the early adoption of AI, benefiting shareholders in the process. Here's why this stock is a buy.
Should I invest $1,000 in Microsoft right now?
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Suzanne Frey, an Alphabet executive, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Danny Vena has invested in Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool has invested in and recommends Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool recommends long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Generative AI Software Revenue Could Grow 18,647% by 2032. The article The 1 Unstoppable Artificial Intelligence (AI) Stock to Buy Before They Buy (Hint: It's not Nvidia) was originally published by The Motley Fool.
