Prediction: This artificial intelligence (AI) stock could be worth more than Microsoft in five years.

microsoft (MSFT -1.27%) is currently the world’s most valuable company, with a market capitalization of just over $3 trillion. The proliferation of artificial intelligence (AI) has played a central role in helping tech giants reach this position.

Microsoft stock has risen more than 72% since early 2023, when the AI ​​revolution began to take hold. The performance of the stock is Nasdaq 100 Technology Sector Index for this period. Microsoft’s impressive rise seems unsurprising given that it quickly monetized its partnership with OpenAI and offers a wide range of AI-focused solutions across its software portfolio.

Microsoft is already making big moves with AI, and the company is seeing growth in lucrative markets like cloud computing. Looking ahead, Microsoft could maintain a solid AI business by adopting the technology in workplace collaboration, cloud, gaming, and personal computer (PC) markets.

However, Microsoft itself expects AI to only gradually contribute to its growth. Meanwhile, analysts at investment banking firm Evercore predict that AI could add $100 billion to Microsoft’s annual revenue by 2027. The company’s trailing 12-month revenue of $575 billion suggests that AI could boost Microsoft’s revenue by 17% over the next three years. Based on Evercore estimates.

This probably explains why analysts expect Microsoft’s profits to grow at 16% per year over the next five years. That’s a decent pace of growth, but there are other AI stocks expected to grow even faster over the next five years, and they could even be worth more than Microsoft.

In this article we will look at one such name.

Amazon could be a big winner in the AI ​​revolution

Amazon (AMZN -2.56%) is the sixth largest company in the world with a market capitalization of $1.9 trillion. Similar to Microsoft, the e-commerce and cloud computing giant is actively incorporating his AI elements into its various services.

For example, the company powers its cloud computing business, Amazon Web Services (AWS), by offering customers “the broadest collection of computing instances.” AWS customers not only have access to the chip giant’s chips Nvidia You can train and deploy your AI models on cloud computing platforms, but if you’re looking for performance on a budget, you can also access Amazon’s in-house chips for your AI needs.

At the company’s February earnings conference, Amazon executives said, “Several customers… [use] “Anthropic, Airbnb, Hugging Face, Qualtrics, Rico, Snap, and more are using our AI chips.” Every company has different needs when it comes to developing AI applications, and everyone wants to buy expensive Nvidia graphics cards. This is not surprising since it does not require any ability. .

Amazon recognizes this and is leveraging its position as a leading cloud computing provider to win more AI-related business. AWS controlled 31% of the cloud infrastructure market at the end of last year. Demand for AI services in the cloud will grow at 36% annually through 2032, potentially reaching $887 billion in annual revenue by the end of the forecast period, making it a smart move for Amazon to integrate AI tools into its platform. It’s a movement.

The good news for Amazon investors is that cloud isn’t the only area where the company is deploying AI to drive long-term growth. It has also introduced AI tools specific to e-commerce. Amazon has harnessed the power of generative AI to allow sellers to create product pages on their e-commerce platform with just a link to her website. Sellers no longer have to go through the long and tedious process of manually filling out product pages.

So it’s no surprise that over 100,000 of the company’s reseller partners are already using this tool, which simplifies the process of creating a listing on the platform. The ease of creating product pages allows Amazon to attract more sellers and potentially capture a larger share of the e-commerce market in the future.

At the same time, Amazon rolled out a generative AI-powered assistant known as Rufus to improve product discovery for customers shopping on its platform. Amazon trained Rufus using “an extensive product catalog, customer reviews, community Q&A, and information from across the web.” As a result, the company could use its AI to recommend the right products to further encourage customers to spend on the platform.

Overall, it’s easy to see why analysts expect Amazon to post a healthy annual revenue growth rate of 30% over the next five years. But will this help him become bigger than Microsoft in five years?

Can Amazon overtake Microsoft?

Amazon ended 2023 with earnings of $2.90 per share. In fact, if revenue grows at 30% per year over the next five years, Amazon’s bottom line could soar to $10.77 per share. The company’s stock is currently trading at a forward price/earnings ratio of 44 times. This is in line with the US technology sector’s earnings multiple. Given that Amazon’s revenue growth is expected to accelerate over the next five years compared to the 10% growth it recorded over the past five years, the market is likely to reward the company with even richer multiples. be.

But even if Amazon maintains its expected five-year earnings multiple, the stock could jump to $474. This is a 158% increase from current levels and means Amazon’s market capitalization could increase to $4.9 trillion in five years.

Microsoft’s expected earnings growth rate is 16%, meaning it could reach a bottom line of $20.60 in five years (based on fiscal 2023 earnings of $9.81 per share). Microsoft currently trades at 31 times forward earnings, which is slightly above the company’s five-year average forward multiple of 29 times.

Given that Microsoft is expected to have slower revenue growth than Amazon, assume that Microsoft trades at a discount to Amazon and maintains a five-year P/E ratio of 29x based on a five-year average. Masu. In other words, Microsoft’s stock price could soar to $597 in five years. This is a 43% increase from current levels and means the market capitalization could rise to $4.4 trillion in five years.

Therefore, we cannot rule out the possibility that Amazon will become a bigger company than Microsoft within five years. That’s why investors looking to buy AI stocks with the potential for healthy returns over the long term should keep an eye on this stock.