Top Artificial Intelligence (AI) Stocks to Buy According to Wall Street Analysts

Last year, with Keith Wise(Keith Weiss)headMorgan Stanley (financial services company) (Morgan) Stanley) Analysts are of the opinion thatMicrosoft (NASDAQ resonance stock code: MSFT)) is the software company best positioned to monetize generative artificial intelligence (AI) across infrastructure and applications.

In a recent survey of chief information officers (CIOs), Weiss reiterated his view that Microsoft is the company most likely to gain a share of the generative AI space over the next three years.381 TP3T's CIO chose Microsoft, and 121 TP3T's CIO chose Microsoft.Amazon. Amazon.In second place.

Investors should be excited about AI given the tremendous opportunities it creates. According to Bloomberg Intelligence, AI-generated spending will grow at a compound annual growth rate of 43% by 2032, but it is unwise to buy a single AI stock, even if the company is expected to be the biggest winner. It makes more sense to own a basket of AI stocks. Therefore, investors need to ask themselves if Microsoft belongs in this basket.

Microsoft Uses Artificial Intelligence to Supercharge Business

Microsoft has two major growth engines in enterprise software and cloud computing. Not only does the company have a strong presence in both markets, but its share is growing. This makes Microsoft ideally positioned to monetize artificial intelligence (AI) in software and cloud services, and new offerings such as Microsoft 365 Copilot and Azure OpenAI Service should help the company achieve this goal.

In detail, Microsoft led the enterprise software market last year, accounting for 18% of total sales, up 350 basis points from 2018, according to Data International. Its flagship productivity platform, Microsoft 365, was a major source of this success. The company is building on this momentum with Microsoft 365 Copilot, a generative AI assistant that automates tasks in office applications such as Excel, PowerPoint and Word.

Meanwhile, Microsoft Azure ranked second in cloud infrastructure and platform services (CIPS) in the fourth quarter. It accounted for 24% of CIPS spending, up 750 basis points from 2018, according to Synergy Research Group. Product categories contributing to these share gains included cybersecurity, databases and developer services, particularly those related to artificial intelligence and machine learning.

Looking ahead, Microsoft is well positioned to maintain this trend.Azure is the exclusive cloud provider of OpenAI, which means it can monetize the use of the popular chatbot ChatGPT. In addition, the Azure OpenAI service allows organizations to customize the OpenAI large-scale language model to build customized generative AI applications. Finally, CEO Satya Nadella recently told analysts that Azure provides the best infrastructure for AI training and reasoning.

Amazon Web Services currently holds a 31% market share in CIPS, but analysts at Morgan Stanley believe Microsoft could overtake Amazon as the market leader by 2027.

Microsoft's Q2 Financial Report Beats Expectations

Microsoft announced its December quarterly earnings report, which showed strong business results. Revenue rose 18% to $62 billion, driven in part by strong growth in enterprise software and cloud computing services. This exceeded analysts' expectations of $61.1 billion. Similarly, non-GAAP net income increased 261 TP3T to $2.93 per share as a result of continued cost reductions. This exceeded analysts' expectations of $2.78 per share.

On the earnings call, chief executive officer Satya Nadella emphasized market share growth in cloud computing and software of all kinds. He attributed the growth momentum in these markets to the "artificial intelligence advantage" cultivated by Microsoft. This "tailwind" will continue in the future. Morgan Stanley analysts believe that in fiscal year 2029, Microsoft 365 Copilot and Azure's AI revenue will reach $ 121 billion.

Investors should look to AI as an incremental opportunity in the broader enterprise software and cloud computing markets, which are projected to grow at an annual rate of 13.7% and 14.1%, respectively, by 2030. this means that Microsoft is likely to achieve annual sales growth of more than 14%, depending on how successfully it monetizes AI.

Microsoft shares look expensive compared to Wall Street consensus forecasts

Wall Street analysts expect Microsoft's sales to grow at an annualized rate of 14% over the next five years, which makes the current valuation of 13.8 times sales a bit expensive. In detail, Microsoft's sales growth rate of 14% over the past five years is the same as analysts' expectations for the future, but the average valuation for this period is 10.6 times sales.

In other words, during a period when sales were growing at 14%, the market valued Microsoft at 10.6 times sales. So why is the market now valuing the company higher when sales are expected to grow at the same rate? As much as possible, there is another way to look at this situation.

The Modified Market Hypothesis states that all publicly available information is immediately factored into the stock price, which means that investors are comfortable with the current valuation, even though they have reached a consensus on what to expect in terms of sales. This means that if Microsoft's sales grow faster than expected, the stock could be undervalued. For example, Morgan Stanley is optimistic that Microsoft's annual sales will grow 16% by FY2029.

Here's the bottom line: Microsoft is a competitively advantaged company with strong capabilities in enterprise software and cloud computing. As such, Microsoft should be a major beneficiary, perhaps even the biggest, as AI spending increases. However, the stock is trading at a premium to its historical valuation and is overpriced compared to Wall Street's consensus sales forecasts. Therefore, investors who think Microsoft can outperform the consensus should consider buying a small position today.

Invest $1,000 now

It pays to listen to our team of analysts when they have stock investment advice. After all, they've been running a newsletter for 20 years calledMotley Fool Stock AdvisorIt has more than tripled the market.

They have just announced what they think investors are currently doing.-est (superlative suffix)Worth Buying10Only ...... Microsoft made the list, but there are 9 other stocks you may have overlooked.

View these 10 stocks

*Stock Advisor's Circular as of April 15, 2024

John Mackey, former chief executive officer of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors.Trevor Jennewine owns shares of Amazon.The Motley Fool owns shares of Amazon and Microsoft.The Motley Fool recommends the following options: a January 2026 $395 call option long on Microsoft and a January 2026 $405 call option short on Microsoft.The Motley Fool has the following options: a January 2026 $395 call option long on Microsoft and a January 2026 $405 call option short on Microsoft. The Motley Fool recommends the following options: Microsoft January 2026 $395 Call Option Long and Microsoft January 2026 $405 Call Option Short. The Motley Fool has a disclosure policy.

The Artificial Intelligence (AI) Stocks Wall Street Analysts Think Are the Best Buys Right Now was originally published on The Motley Fool.