Microsoft (NASDAQ:MSFT) stock was flying high and touched 52-week highs of $468 on July 5. However, a relatively sharp correction occurred with Microsoft stock declining by 11% within one month. With MSFT reporting Q4 of fiscal year 2024 numbers, there seems to be some skepticism related to growth driven by artificial intelligence (AI).
Yet, some big AI investments by the firm will yield results in the coming years. While I expect further correction in MSFT stock, there is likely to be a good buying opportunity if Microsoft stock trades in the range of $350 to $370.
Before examining reasons for optimism for the long term, I must mention the following. Microsoft Chief Financial Officer Amy Hood believes that Azure growth is likely to “accelerate” in the second-half of 2025. It’s a clear indication that the tech giant will have relatively soft earnings in the next six months.
This is the reason to believe that Microsoft stock is likely to remain in a downtrend. Investors are increasingly looking beyond the AI hype and focusing on the euphoria translating into numbers. That may happen for Microsoft, but investors need to wait.
Growth from Co-Pilot In Office 365 And Azure AI
Notably, as of Q4 FY24, Microsoft 365 consumer subscribers grew by 10% to $82.5 million. Currently, the company’s Copilot Pro (AI assistant) for consumers is priced at $20 per month. If 50% of consumers subscribe, it would imply an annual recurring revenue of $9.9 billion. This puts into perspective the potential for growth.
Both Business and Enterprise subscription for Copilot is $30 per month. This is likely to have a bigger impact on recurring revenue as compared to consumer subscribers. Estimates suggest that 345 million people are currently using Microsoft 365 (paid seats).
Further, if we look at Azure AI, Satya Nadella had indicated during Q3 FY24 that the company has 53,000 customers. With a comprehensive suite of Azure AI services, this segment is likely to be the growth driver in the second half of fiscal year 2025.
According to Goldman Sachs, Azure AI services have a revenue potential of $200 billion in the next five years. This underscores my view that any weakness in Microsoft stock is a buying opportunity.
Microsoft Is A Cash Flow Machine
There can be rosy growth stories. However, businesses are ultimately valued based on their cash flow potential. For the last financial year, Microsoft reported operating cash flow of $119 billion.
I mentioned above that Azure AI has a revenue potential of $200 billion in five years. This alone would imply an incremental cash flow of over $100 billion. This is an indication of the free cash flow potential from the business.
Importantly, Microsoft reported capital investment of $19 billion for Q4 FY24. This was mainly focused on supporting demand for cloud and AI offerings.
With high cash flow potential, Microsoft is positioned to make aggressive investments in the coming quarters. This will probably yield results in the form of accelerated growth for Azure in the next 24 to 36 months. However, I expect Microsoft stock to trend higher well before the investment cycle is over.
Bottom Line: Wait For Further Correction To Grab This AI Play
The AI hype is likely to die in the coming months. The extra froth in the valuation of AI focused companies will therefore disappear. However, AI will no doubt have an impact across industries, and the addressable market is significant. Microsoft, with some big investments, is positioned to grab a piece of the pie.
Having said that, the next two quarters are likely to be relatively muted. This might be a time for some price and time correction in Microsoft stock. I believe that levels of $350 to $370 would be an attractive entry point. These levels would imply a forward P/E of 26 to 28 times FY25 earnings. From these levels, Microsoft stock can potentially double in 36 to 48 months.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.