Microsoft’s stock price would need to rise 41% from current levels to reach a market cap of $5 trillion.
The company’s artificial intelligence tools have gained huge traction in the productivity space, while its cloud business is also booming.
Wedbush’s Dan Ives predicts Microsoft will become a $5 trillion company next year, and it wouldn’t be surprising to see the company actually reach that milestone.
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NVIDIA(NASDAQ: NVDA) A few months ago, the company briefly became the first company to surpass $5 trillion in market capitalization, driven by significant revenue and earnings growth thanks to its dominance of the artificial intelligence (AI) chip market.
Since then, however, the chip giant’s shares have retreated, continuing its impressive growth despite its size. Concerns about the artificial intelligence boom turning into a bubble and the sustainability of the massive infrastructure spending that has driven Nvidia’s remarkable growth over the past three years have begun to weigh on the stock.
But there’s another company— Microsoft(NASDAQ:MSFT) ——This is to make full use of the proliferation of artificial intelligence. One analyst believes the “Big Seven” company could be worth $5 trillion by 2026. Let’s take a closer look at Microsoft’s prospects and why it could hit the $5 trillion market capitalization milestone in the new year.
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It is undeniable that Nvidia’s chips have played a crucial role in the widespread adoption of artificial intelligence technology. However, the computing power provided by its chips is ultimately used to create customer-facing solutions. For example, training OpenAI’s ChatGPT would have been impossible without Nvidia’s chips, but the chatbot has become popular because of what it does for users.
From helping users write emails to create images to drafting documents and writing code, ChatGPT’s versatility and productivity are key reasons for its huge success. Not surprisingly, ChatGPT parent company OpenAI notes that it now has more than 1 million paying enterprise customers, while more than 800 million users use ChatGPT every week.
Microsoft made a smart move in 2019 by investing in OpenAI. It still holds a 27% stake in OpenAI, a company reportedly worth $500 billion. It’s not just the financial aspects, however, OpenAI also provides Microsoft with access to large language models (LLMs) and applications, allowing it to build a broad portfolio of AI-driven tools and deploy them into its products.
From cloud computing to personal computing to productivity tools, Microsoft has integrated artificial intelligence into all areas of its business. On the bright side, its artificial intelligence tools are winning over customers. For example, Microsoft management said during the company’s October earnings call that its chat-based artificial intelligence assistant Copilot is now used by 90% of Fortune 500 companies.
Even better, Microsoft says “the vast majority of our enterprise customers continue to come back for more seats.” Even coders and cybersecurity experts are using Microsoft’s Copilot to increase productivity and increase the effectiveness of their tools. So it’s no surprise that Microsoft will capture a larger share of the office productivity tools market in the long run (compared to its current 30% share).
On the other hand, demand for Microsoft’s Azure cloud infrastructure is outpacing supply. This explains why Microsoft plans to double its data center capacity over the next few years to meet rapidly growing demand from customers looking to build artificial intelligence tools on its platform.
It is worth noting that as of the end of the last quarter, Microsoft’s commercial remaining performance obligations (RPO) were as high as US$392 billion, a year-on-year increase of 51%. This metric refers to the total value of outstanding contracts. The size of Microsoft’s RPO is larger than the $294 billion in revenue recorded in the past 12 months. Additionally, its RPO is growing faster than the 18% revenue growth Microsoft recorded last quarter, suggesting it’s winning new business faster than it can fulfill existing contracts.
So don’t be surprised if Microsoft accelerates its growth by 2026, putting the tech giant on track to reach a $5 trillion market cap.
Microsoft’s current market capitalization is $3.6 trillion. Therefore, it would need to appreciate another 41% from current levels to reach the $5 trillion milestone. Analysts expect Microsoft’s revenue to rise 16% to $327 billion this fiscal year and 15% to $376 billion next fiscal year.
However, Microsoft’s massive RPO and the pace at which that metric is growing suggest it could beat those expectations. Assuming Microsoft’s revenue grows 20% next fiscal year to $392 billion (compared to expected revenue of $327 billion this year) and trades at 13 times sales at that time, its market capitalization would be just over $5 trillion at current price-to-sales ratios.
As such, this AI stock appears poised to deliver healthy gains in the coming year, which is why investors might consider adding it to their New Year’s buy list.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Microsoft and Nvidia. The Motley Fool recommends the following options: Long January 2026 Microsoft calls at $395 and short January 2026 Microsoft calls at $405. The Motley Fool has a disclosure policy.
Prediction: This company will reach a $5 trillion market cap by 2026 (hint: it’s not Nvidia) Originally published by The Motley Fool
