Microsoft Stock: Why This Magnificent 7 Baddie Is Leaving AMZN and GOOG in the Dust

Stocks to buy

For investors looking at stocks in the Magnificent 7 group, Microsoft (NASDAQ:MSFT) stock could be the best choice in the bunch.

A strong player in the AI, cloud, and software markets, Microsoft really provides the durable long-term growth profile most investors are after.

Indeed, the company’s recent increased focus on its AI investments are what’s driving most of the demand around MSFT stock in recent months.

Microsoft has announced its expansion plans this year with its $2.9 billion investment in its Japan-based AI cloud infrastructure.

In Q4, the company saw a 24% increase in cloud revenue and AI, which is integrated across its tech segments.

Accordingly, it’s clear that Microsoft is positioned for more growth in both sectors. Let’s dive into why this stock could be the preferable way to play big cap tech right now.

A Closer Look at MSFT Stock

Microsoft’s upcoming quarterly reports could reveal it’s gaining ground on cloud-computing leader Amazon (NASDAQ:AMZN), thanks to its innovative AI features powered by OpenAI.

The Redmond-based company has outpaced Amazon and Google with tools like Copilot, which was introduced for $30 a month last November.

RBC Capital Markets’ Rishi Jaluria noted that Azure is reaping the benefits of Microsoft’s AI strategy, foreseeing Microsoft gaining ground on Amazon.

He also expects cloud providers to profit from technology spending, stabilizing despite economic uncertainty. 

Notably, Microsoft has also introduced Phi-3 Mini, a smaller AI model with 3.8 billion parameters, available on Azure, Hugging Face, and Ollama.

Phi-3 Small (7B parameters) and Phi-3 Medium (14B parameters) are forthcoming as additional new features. Parameters determine a model’s complexity, with Phi-3 outperforming Phi-2, approaching responses of models 10 times its size.

Recent reports suggest that Phi-3 Mini could match the capabilities of larger models like GPT-3.5 over time, but using less resources. That’s the sort of story many investors can latch onto.

Small AI models are cost-effective and perform better on personal devices. Microsoft established a team for lightweight AI models and introduced Orca-Math for math problem-solving.

Now, competitors like Google with Gemma and Anthropic with Claude also offer small AI models for various tasks.

However, Microsoft could take the lead in this space over time, given the depth of its pockets and the AI talent it’s brought aboard in recent years.

Q3 Earnings

Microsoft’s fiscal third-quarter earnings were released on Thursday. And boy, did investors get what they wanted to see.

The company beat estimates on both the top and bottom-line, with significant growth seen in Microsoft’s cloud computing business. This growth was increasingly driven by Copilot and the overall Copilot stack, which CEO Satya Nadella referred to as integral to a “new era of AI transformation” at the company. The company estimates that its AI integrations led to 7% of contribution to Azure’s impressive results over the past quarter.

That’s impressive, and that’s the meaningful top and bottom-line impact investors want to see. Besides these strong backwards-looking numbers, the company released guidance that was ahead of expectations. So, overall, investors saw some very strong numbers for Microsoft this past quarter, and an equally strong outlook to latch onto.

Partnerships Here and There

Microsoft significantly boosted its AI endeavors as Coca-Cola (NYSE:KO) signed a five-year, $1.1 billion deal to use Microsoft’s Azure cloud services and AI technology.

Microsoft’s executive vice president and chief commercial officer, Judson Althoff, highlighted the progress in accelerating AI transformation across Coca-Cola and its bottlers worldwide.

Moreover, Microsoft and Cognizant are teaming up to expand enterprise adoption of generative AI. Cognizant acquired 25,000 Microsoft 365 Copilot seats and 500 each of Sales Copilot and Services Copilot for its global associates.

This move aims to streamline workflows and enhance customer experiences. Additionally, the partnership will promote the use of generative AI across Cognizant’s client base through its advisory and digital transformation services.

Cognizant aims to roll out Microsoft 365 Copilot to one million users across its 2,000 global clients in 11 industries.

Their Synapse skilling program plans to train over one million individuals in AI skills by 2026. However, some CIOs are skeptical about the ROI of generative AI co-pilots due to high costs and workflow adjustments.

On the date of publication, Chris MacDonald did not have (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.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.

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