The Best Trillion-Dollar Stock to Buy Right Now, According to Wall Street

While many investors are concerned about the growing concentration of large companies' stocks in the S&P 500, most analysts seem to think the trillion-dollar behemoths could get even bigger relative to the rest of the market. They see tremendous upside in most megacap stocks based on their price targets.

Increased spending on artificial intelligence (AI) has driven the valuations of many of the largest companies in the world, and that trend isn't slowing down anytime soon. Semiconductor stocks, including Nvidia, Broadcom, and Taiwan Semiconductor Manufacturing, may still be great growth opportunities. Analysts' median price targets on those stocks are as much as 50% higher than their prices as of this writing.

Meanwhile, cloud computing stocks like Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), Microsoft (NASDAQ: MSFT), and Amazon (NASDAQ: AMZN) also hold tremendous upside, according to analysts. Investors could see 36% upside for Amazon based on analysts' targets and 31% for Alphabet. But the trillion-dollar stock with the most upside based on analysts' median price targets is Microsoft, which could climb 61% to reach $600 per share, according to the median price target.

Here's why Microsoft stock is worth buying right now.

Image source: Getty Images.

What's weighing on this AI giant?

Microsoft is stuck in the crosshairs of two major artificial intelligence-related concerns for investors.

The first concern is that Microsoft is spending too much on AI compute capacity for its Azure cloud computing platform. The company's capital expenditures (capex) climbed to $37.5 billion last quarter, up 66% year over year. That includes a significant shift to cash paid for property and equipment instead of commercial leases, as it spends heavily on chips.

Meanwhile, Azure revenue grew 39% in the most recent quarter, the same pace it has grown for the last two quarters. That stands in contrast to the faster growth in spending and the accelerating revenue growth at its biggest competitors. Alphabet saw Google Cloud revenue climb 48% year over year in its fourth quarter, up from 34% growth in the prior quarter. Amazon's larger Amazon Web Services (AWS) saw revenue increase 24%, accelerating from 20% growth.

It's worth noting that both Alphabet and Amazon shared plans to step up spending on their cloud platforms with their most recent earnings results. And despite their accelerating revenue growth, investors punished both stocks for the massive capex budgets they have planned for the year.

But Microsoft is also facing the challenge of running a massive enterprise software business. Investors have turned bearish on many software stocks over the last few months as the potential for generative AI to disrupt many of their businesses has increased. Tools like Claude Cowork could displace the need for more expensive and dispersed software solutions, reducing the future earnings of many software companies. As a result, analysts have rerated the earnings multiples they're willing to assign software stocks.

The combined effect of both concerns has led to a significant drop in Microsoft's share price. The stock is down more than 30% from the high price it reached in last year's Q4, as of this writing.

Analysts are still bullish for good reason

While market pressures have pushed Microsoft's stock price lower, the underlying fundamentals of Microsoft's business look as strong as ever. That could make the current price an incredible opportunity for investors.

The concerns regarding its cloud computing spending appear overblown. Management noted that Azure revenue could have been higher in the most recent quarter, but it used some of its compute for its own AI development. The business remains capacity-constrained, but it decided to forego some revenue now in order to support its long-term AI vision for its enterprise software business. As such, the acceleration in Azure revenue may lag its competitors, but it's not out of the question for the forthcoming quarters.

Microsoft notably ended December with remaining performance obligations (RPOs) across Azure and its enterprise software division totaling $625 billion. About $250 billion of that is tied to a new agreement with OpenAI struck last October. However, the rest of its RPO still climbed 28% year over year, indicating broad demand from customers. The majority of its obligations are more than one year out, which means it can spend now, use its capacity, and then ensure it has availability when it needs it in the coming years.

Meanwhile, Microsoft is seeing strong momentum with its software. Microsoft 365 Commercial revenue climbed 17%, driven by higher-priced software packages and its Copilot assistant. Its Dynamics 365 revenue climbed 19%. And consumer Microsoft 365 subscription revenue soared 29%, thanks to a price hike and 6% subscriber growth. Microsoft could see continued momentum in the coming year as it upgrades commercial customers to its E7 Microsoft 365 package, which includes more AI features.

As such, investors should expect strong revenue growth for the company across both cloud and its main software business. But shares now trade for just 22 times forward earnings expectations. A 61% increase in the stock price with no increase in analysts' earnings-per-share (EPS) expectations would put it at roughly 35 times calendar 2026 earnings expectations and around 30 times calendar 2027 earnings expectations. That's a reasonable price to pay for a company with solid moats around its businesses and strong revenue growth.

Adam Levy has positions in Alphabet, Amazon, Microsoft, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.