Could these “Magnificent Seven” stocks become the first $10 trillion companies by 2035?

microsoft (MSFT 0.74%) It hit a new all-time high on Tuesday, keeping pace with the broader market rally. A few days ago, on May 20, at an event held at Microsoft’s new campus, Microsoft introduced its lineup of Windows personal computers (PCs) designed for artificial intelligence (AI).

Called Copilot + PC, it includes Microsoft Surface and manufacturing partners Acer, ASUS, Dell Technologies, HP, lenovoand samsung Pricing starts at $999 and will be available as early as June 18th.

Here’s what Copilot + PC adds to Microsoft’s already strong investment thesis and why the growth stock has what it takes to achieve a $10 trillion market cap by 2035.

Image source: Getty Images.

The next step for everyday AI

Copilot on Windows is now available on approximately 225 million Windows 10 and Windows 11 PCs, Microsoft said in its fiscal 2024 third quarter earnings call. This is double the number from the previous quarter. Copilot is Microsoft’s AI-powered chatbot assistant for Microsoft 365 apps and more. According to a May 20 press release:

Copilot+ PC is the fastest, most intelligent Windows PC ever. Made with powerful new silicone With amazing 40+ abilities With trillions of operations per second (TOPS), all-day battery life, and access to cutting-edge AI models, Copilot+ PC lets you do things no other PC can. Easily find and remember what you’ve seen on your PC with Recall, create and refine AI images in near real-time directly on your device with Cocreator, overcome language barriers with live captions, and translate audio from 40+ languages ​​into English.

Building PCs with AI in mind is good for the industry because it can support demand for AI-based chips, increase user productivity, and create opportunities for developers and consumer electronics companies. In a recent earnings call, Microsoft said it offers a diverse set of AI accelerators. nvidia, advanced micro devicesAnd it’s our own “in-house silicon”.

The big test for the AI ​​growth narrative will be adoption. If consumers embrace these latest AI-driven products, they will prove that AI is not a fad, but the next information revolution.

Best AI play

Microsoft may not be the purest AI play (I think Nvidia will take its place). But Microsoft is arguably the most multi-layered AI opportunity because it’s monetizing new technologies in so many different ways.

In addition to the PC market, Microsoft has integrated AI into its intelligent cloud business through Azure OpenAI, which is used by more than 65% of Fortune 500 companies.

GitHub Copilot continues to grow at a tremendous pace. Two quarters ago, in the second quarter of fiscal 2024, Microsoft reported a 30% quarter-over-quarter increase in subscribers, reaching 1.3 million total paid subscribers. However, the third quarter saw even faster growth, with paid subscribers increasing 35% to 1.8 million.

Microsoft also offers custom AI support through Copilot Studio. Copilot Studio reported a 175% quarter-over-quarter increase in adoption, bringing the total number of organizations using the service to more than 30,000. Power Platform is a similar tool used by businesses to build AI-based applications. In a recent quarter, Microsoft said more than 330,000 organizations were using the Power Platform, including more than half of the Fortune 100. Power Apps, which uses Copilot to help users write code for app design, has grown more than 40% year-over-year to reach over 25 million monthly active users.

The key takeaway from the last few earnings calls is that Microsoft is quickly monetizing AI across its business. This isn’t a crazy idea. We are now developing, implementing and marketing the solution.

The Power of Deep Pockets

Spanning cloud computing, enterprise and consumer software and hardware, gaming, social media, and more, Microsoft has multiple touchpoints to connect with a wide range of customers. Aside from its industry-leading position in numerous end markets, the company’s greatest strength is its margin of error.

AI and the technology sector in general will eventually experience a cyclical downturn. This will result in stronger companies with the cash flow and balance sheets to invest through the cycle. No company can withstand and profit from a recession better than Microsoft.

It ended the latest quarter with cash, cash equivalents and short-term investments of just over $80 billion, compared to $42.7 billion in long-term debt.

Sales, net profit, and operating profit ratio all hit 10-year highs. This generated $86.2 billion in trailing-12-month (TTM) net income, more than double the $21.3 billion it spent on dividends and the $16.8 billion it spent on share buybacks. The company has the wherewithal to invest aggressively in organic growth, make strategic acquisitions, increase its dividend, and repurchase shares.

Microsoft pays more dividends than any other U.S.-based company and spends more on stock buybacks than on stock-based compensation. We are now reversing the trend of dilution from stock-based compensation, reducing the number of shares outstanding. Microsoft is at the top of the game. But it also has the capabilities needed to withstand economic downturns while rewarding shareholders through share buybacks and dividends and investing in long-term growth.

The path to $10 trillion

August 2018, apologize It became the first American company to surpass $1 trillion in market capitalization. This is a feat that once seemed impossible. However, Nvidia’s market capitalization has increased by more than $1 trillion this year alone.

With a market capitalization of $3.2 trillion, Microsoft is currently the most valuable company in the world. The stock is up more than 1,100% over the past 11 years. Thanks to the power of compound growth, it doesn’t need that much profit to reach a market capitalization of $10 trillion by 2035.

For Microsoft’s market capitalization to reach $10 trillion, it only needs to achieve an average annual growth rate of 10.9% over the next 11 years. There are a few ways that could happen.

The first and simplest one is revenue growth. If Microsoft maintains the same price-to-earnings (P/E) ratio, its stock price will rise at the same rate as its earnings.

Microsoft’s current P/E is 37.2. If earnings increase by 10%, the stock must also increase by 10%, or the P/E will fall. Now, I would argue that Microsoft could grow its earnings per share (EPS) at a CAGR of around 15% over the next 11 years, especially when taking stock buybacks into account. However, if growth and investor optimism begin to cool, valuations may decline.

Assuming a P/E of 30 and a CAGR of 15% over the next 11 years, Microsoft will grow its EPS from $11.54 to $54. Applying a P/E of 30 to this figure results in a stock price of $1,620. That means Microsoft’s market capitalization is just over $12 trillion.

So even if Microsoft’s P/E declines, it could reach $10 trillion by 2035 if its annual EPS grows at a low to mid-teens rate. For context, Microsoft’s TTM EPS increased 19.2% last year.

Microsoft is worth buying and holding

Microsoft’s mix of proven track record, scale, and growth makes it the best all-round AI company to buy right now. AI is driving margin expansion and driving revenue growth for Microsoft. However, AI adoption is still in its early stages.

Investors should pay close attention to Microsoft’s continued growth in its cloud business and how consumers and businesses receive its new AI-powered Copilot + PC. If adoption is strong, Microsoft could enjoy much faster growth than expected.

Add it all up and Microsoft presents a medium-risk/high-potential reward opportunity with the best chance of becoming the world’s most valuable company by 2035.