The Best Artificial Intelligence (AI) Stock to Buy Now
Key Points
Microsoft owns a stake and partners closely with ChatGPT's creator, OpenAI.
OpenAI's steep financial losses and competitive pressures have weighed on Microsoft.
Despite some risks, buying this dip looks like the wise play.
- 10 stocks we like better than Microsoft ›
Artificial intelligence (AI) is the hottest growth story in the stock market by a mile. As a result, it hasn't been easy to find AI stocks in the bargain bin.
However, Microsoft (NASDAQ: MSFT) has taken it on the chin lately. The stock now sits more than 20% off its high, its sharpest decline in several years. What gives? Investors have raised concerns over OpenAI, in which Microsoft owns a 27% stake and partners closely.
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The situation has weighed so heavily on Microsoft stock that it may be time to swoop in and buy this dip. Here is why the tech giant is the best AI stock you can buy right now.
Image source: Getty Images.
Should investors worry about OpenAI?
The company is burning through billions of dollars, which means it depends on continuously raising funds from investors to stay in business. Additionally, competitors such as Anthropic and Alphabet have eaten into OpenAI's market share. That's not a good combination.
From Microsoft's perspective, the company depends heavily on OpenAI. Management disclosed during its fourth-quarter earnings that OpenAI accounts for roughly 45% of Azure's (cloud business) order backlog. In other words, if OpenAI fails, Microsoft's cloud business would implode.
But OpenAI isn't throwing up its arms. The company is in talks to raise $100 billion to fund its near-term needs. ChatGPT is still the leading AI app. OpenAI is also releasing new products, including Frontier for enterprises, which allows companies to develop, deploy, and manage AI agents that can autonomously perform various tasks.
OpenAI has become a risk to monitor, but it's far too early to panic. The company is just starting to open the door to some potentially massive revenue opportunities.
Why Microsoft's decline is a strong buying opportunity
If you look past OpenAI's drama, Microsoft just put up a pretty strong quarter. Its cloud business grew by 26% year over year to $51.5 billion, an impressive feat for such a large number. Its commercial backlog grew by 110% to $625 billion, which shows how much cloud business OpenAI is funneling to Microsoft.
The stock trades at 25 times Microsoft's earnings after its recent slide. That's its lowest valuation since late 2022, before the AI era really began. Analysts estimate Microsoft's earnings will grow 14% to 15% annually over the next three to five years, and the stock should do well from these levels if the company meets those expectations.
Microsoft is suddenly an unpopular AI stock, but it's probably a mistake to underestimate the tech giant's various entrenched products and services. The stock will probably bounce back once investors feel more confident in OpenAI's footing. It may be wise to buy shares before that happens.
Should you buy stock in Microsoft right now?
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Justin Pope has positions in Alphabet and Microsoft. The Motley Fool has positions in and recommends Alphabet and Microsoft. The Motley Fool has a disclosure policy.
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