This "Magnificent Seven" Stock May Still Be the Best Bargain in Tech Right Now
Key Points
The market may be underestimating Microsoft's growth potential in artificial intelligence (AI).
The company's AI business has more than doubled in just the past year.
At 27 times earnings, it's not an expensive stock to own, especially when factoring in its long-term growth opportunities.
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Sometimes the best deals are right in plain sight. While you might think you need to go into the weeds to find quality stocks and do a lot of research, oftentimes, you just need to be willing to take a chance on a stock that the market has been bearish on of late.
While many tech stocks are trading at high valuations, there's one stock that still looks attractively priced. Not only is it in tech, but it's involved in artificial intelligence (AI), and it's part of the "Magnificent Seven" group of stocks: Microsoft (NASDAQ: MSFT).
Will AI create the world's first trillionaire? Our team just released a report on the one little-known company, called an "Indispensable Monopoly" providing the critical technology Nvidia and Intel both need. Continue »
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Investors may be underestimating Microsoft's growth opportunities in AI
Shares of Microsoft have been rallying over the past month, and the tech stock is no longer near its 52-week low. But with a year-to-date decline of around 5%, it still hasn't attracted a whole lot of excitement and bullishness from investors this year, and that could be a huge mistake.
The company is still only in the early innings of growing its AI business. When it last reported earnings in April, CEO Satya Nadella said that its AI business is now at an annual run rate of over $37 billion in revenue, which is an increase of 123% from the previous year. That's a considerable chunk of the top line for a company that, a few years ago, was generating around $200 billion in revenue; over the past 12 months, its top line has totaled $318 billion.
Microsoft may not get much love because its growth rate hasn't been as explosive as other companies, and perhaps because its Copilot assistant may not have attracted the most favorable attention. But I believe it's going to be one of the biggest winners in AI because of the potential to enhance virtually all of its products and services with next-gen capabilities. Although it's already begun doing so, it's still in the early stages.
Why Microsoft deserves a higher valuation
As far as tech stocks go, Microsoft is a pretty cheap one. Its price-to-earnings multiple is right around 27, which looks like a bargain when you compare it to the Technology Select Sector SPDR ETF, which averages an earnings multiple of more than 40. Microsoft is included in that fund, and it's one of the more reasonably priced stocks in there.
Investors have been dumping the stock these days out of fear that AI may disrupt its business and diminish the need for its software, but if the market were pricing in the opportunities rather than the risks (which appear to be overblown), it would likely command a higher earnings multiple than it does today. I believe the market is making a mistake with the stock. But the good news is that it has created a fantastic buying opportunity for any investor who can recognize Microsoft's promising long-term growth potential.
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft. The Motley Fool has a disclosure policy.
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