Artificial intelligence (AI) has spread like wildfire since early last year, and the benefits are clear. These generative AI algorithms take AI to the next level, creating original text, images, and video from a few simple prompts. As a result, users can simplify mundane and time-consuming tasks and increase productivity. As the old adage states, “Time is money,” so businesses are eager to adopt these next-generation systems.
There’s little argument that Nvidia (NASDAQ: NVDA) has reaped the early rewards of this paradigm shift as the leading provider of the processors and other hardware used to facilitate AI. This led to four consecutive quarters of triple-digit year over year revenue and profit growth, a dividend boost, and an upcoming 10-for-1 stock split.
However, the market is forward-looking, and investors are already beginning to anticipate the coming wave of AI software adoption. Generative AI software sales are expected to surge 6,260% to $318 billion by 2032, according to Bloomberg Intelligence.
It’s clear that Nvidia will continue to profit from its gold-standard AI processors, but there’s another company that’s poised to profit from the adoption of AI software.
Not your grandfather’s Microsoft
Microsoft (NASDAQ: MSFT) rose to prominence by creating its industry-standard Windows computer operating system and Office suite of work productivity software. The company continues to make its mark with its Teams workplace collaboration platform and Azure Cloud. But arguably, the biggest opportunity will come from the proliferation of AI.
While many companies have been jumping on the AI bandwagon, Microsoft was among the first to recognize the transformative potential of generative AI. The company first invested in ChatGPT creator OpenAI back in 2019, boosting its stake to $13 billion early last year. This gave Microsoft the inside track to integrate these advanced algorithms into many of its flagship products and services.
Perhaps the most important development has been the creation of Microsoft Copilot, the company’s growing roster of AI-powered digital helpers, which form the backbone of Microsoft’s AI strategy. The most prominent is Copilot for Microsoft 365, which is deeply integrated into its Office products. The company also developed additional Copilots specific to sales, service, and finance positions, charging customers $30 per user per month, and uptake has been strong. While management hasn’t released detailed figures regarding adoption, some analysts posit that Copilot could generate as much as $100 billion in incremental revenue annually. That’s not all. Microsoft recently unveiled a line of Copilot+ PCs, with the company’s AI-powered digital assistant built in.
As the world’s second-largest cloud infrastructure provider, Microsoft is well positioned to offer AI services to its clients. This, in turn, is attracting new users to its cloud offerings, helping Microsoft gain market share on its cloud rivals. For its fiscal 2024 third quarter (ended March 31), Azure Cloud climbed 31% year over year, faster than Amazon Web Services (AWS) and Alphabet‘s Google Cloud, which grew 17% and 28%, respectively. Management noted that AI “contributed seven points” to Azure’s growth.
In fact, in the calendar first quarter, Microsoft accounted for 25% of worldwide cloud infrastructure spending, compared to 31% for AWS and 10% for Google Cloud. If Microsoft continues to gain ground, there could soon be a changing of the guard among the cloud leaders.
The evidence is clear
Taking a step back shows that Microsoft continues to generate strong results overall. Third-quarter revenue grew 17% year over year to $61.9 billion, while diluted earnings per share jumped 20% to $2.94. Not bad for the world’s largest company by market cap, at nearly $3.19 trillion (as of this writing).
Despite the company’s foundational place in the AI software revolution, Microsoft stock is currently selling for 36 times forward earnings, an attractive price relative to the opportunity.
Generative AI is already sweeping the business world, but it’s still in the early stages of adoption. Microsoft’s strategy of developing a suite of AI-powered Copilots was sheer brilliance, positioning the company to profit from the continued adoption of AI. That’s why Microsoft is a buy.
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Suzanne Frey, an executive at Alphabet, 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 positions in Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool recommends the following options: 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 Sales Could Soar 6,260% by 2032. 1 Unstoppable Artificial Intelligence (AI) Stock to Buy Before It Does (Hint: Not Nvidia) was originally published by The Motley Fool
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