Microsoft's Cloud and AI Growth Justifies Its Valuation
The author of this article has been skeptical about Microsoft's valuation for years but is now changing their mind. With strong growth in cloud and AI, Microsoft's massive valuation seems justified by its earnings power.
Microsoft's revenue climbed 18% to more than $331 billion in the fiscal year ending June 30, with operating income rising 21% to over $155 billion. Net income hit $133.7 billion, with full-year EPS growth above 20%, even after stripping out gains from OpenAI and Anthropic investments.
The AI story is where the author was most wrong in their initial assessment. They assumed the AI halo would be mostly narrative but it has become a concrete, growing business. The Intelligent Cloud segment drove 32% revenue growth, with Azure revenue surpassing $100 billion annually.
Microsoft's custom AI chips can deliver up to 40% better performance per watt, potentially improving cloud margins and earnings. Copilot, a key component of Microsoft 365, has passed 30 million paid seats, with net seat adds more than doubling quarter over quarter as enterprises move from pilots to production.
The author notes that while the valuation is not cheap in an absolute sense, it looks fair for a business with Microsoft's moat and growth profile. The company trades at a trailing P/E of 28 to 28.5, slightly below its 10-year average of 30, with forward P/E estimates around 25 based on current consensus.