Microsoft’s (MSFT) strong leverage to multiple aspects of AI enabled it to recently report very impressive quarterly results and should enable it to grow rapidly for the foreseeable future. Moreover, the tech giant’s revenue from the AI tools that it sells is growing extraordinarily rapidly, while MSFT looks poised to meaningfully benefit from selling AI-enabled products and other systems to the Pentagon in the medium-to-long-term. Finally, the shares’ valuation is attractive.
In light of these points, I recommend that investors looking for a Mag 7 name to buy consider purchasing MSFT stock.
Impressive Financial Results, Largely Driven by the AI Revolution
MSFT’s overall revenue during its fiscal third quarter, which ended on March 31, jumped 13% versus the same period a year earlier, while its operating income climbed 16% year-over-year.
The sales of Azure, the conglomerate’s cloud-infrastructure unit, soared 33% year-over-year in Q3., coming in well above analysts’ average estimate of a YOY gain of 29.7%. MSFT estimated that increased demand for the unit’s AI offerings accounted for nearly half of its growth.
And the AI Revolution is reportedly significantly increasing companies’ spending on the cloud. Providing evidence for the latter point, Reuters recently reported that, “Cloud spending from major enterprises has remained resilient even amid global macroeconomic uncertainty over the past few months, as companies invest heavily in artificial intelligence to modernize their digital infrastructure.” Further, a report issued last October declared that “The average company is spending 30% more on the cloud compared to last year, and AI and generative AI are the big culprits.”
Moreover, the revenue of MSFT’s Intelligent Cloud unit, which includes “Azure and other cloud services,” climbed 21% year-over-year to $26.8 billion. Among the items in the “Azure and other cloud services” category are “cloud and AI consumption-based services.”
Intelligent Cloud’s revenue increased by $4.6 billion versus the same period a year earlier. Meanwhile, the tech giant’s overall sales rose by 13% to $70.1 billion. That works out to a gain of $8.25 billion.
In light of this data and the fact that cloud spending growth is being primarily driven by the proliferation of AI, it’s clear that a very high percentage of MSFT’s growth is being spurred by the AI Revolution. Indeed, considering that the company’s AI-powered personal assistant, Copilot, is included in a different business unit, a majority of the company’s revenue growth is likely being driven by AI.
Large Increases in the Use of AI Tools and Strong Potential From the Pentagon
The conglomerate’s Real-Time Intelligence tool, which “handles…AI,” along with modeling, analytics, and many other activities related to data, is being used by 40% of MSFT’s customers, just five months after it was launched, CEO Satya Nadella reported on the company’s Q3 earnings call, which was held on April 30.
Additionally, the number of users of the firm’s AI-powered programming assistant, GitHub Copilot , soared more than four times year-over-year to over 15 million, while the number of users of Microsoft 365 Copilot jumped three times YOY and the number of physician patient encounters documented by its AI healthcare tool, Dragon CoPilot, climbed over 50% versus the previous quarter to 9.5 million.
And interestingly, a survey of UK government workers found that Microsoft 365 Copilot saved the employees an average of 26 minutes per day. This data point suggests that the tool can save government agencies and companies a great deal of money and indicates that the product will generate a needle-moving amount of revenue for MSFT over the longer term.
Meanwhile, MSFT already has an extensive relationship with the Pentagon. For example, a year ago, the agency was reportedly seeking to have all of its components “start upgrading to Microsoft’s E5 licenses” by June 3, 2024, Axios reported. The Defense Department gave its managers until June 2025 to complete the move, the publication stated.
Further, in January 2025, the tech giant disclosed that it had obtained approval to provide government agencies with 26 new products from “its top-secret cloud environment.” The systems, which will be used to handle ” the government’s most classified information,” include multiple AI tools.
Also importantly, Defense Secretary Pete Hegseth has promised to utilize AI for many activities within the Pentagon. And finally, Microsoft’s partnership with Palantir (PLTR), which has obtained multiple, major contracts from the Pentagon related to AI, should help MSFT benefit meaningfully from the agency’s increased use of the technology.
The Bottom Line on MSFT
The AI Revolution is tremendously benefiting MSFT. With many experts saying that this boom is only in its early stages and with the tech giant poised to benefit from the Pentagon’s increasing reliance on AI, the firm’s growth is likely to accelerate over the longer term.
Finally, MSFT stock’s forward price-earnings ratio of 31 times is rather low, given its powerful growth and ample future opportunities.
*This article is intended to be informational only; it is not financial advice.
