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Microsoft's cloud business is benefiting from growing demand for AI services.
Microsoft’s cloud revenue grew 26% year over year in the most recent quarter.
The company is actively expanding its data center capacity, which could lead to accelerating cloud growth.
Investors don't need to chase risky small-cap stocks to ride the artificial intelligence (AI) boom. Big tech companies are the ones driving the adoption of artificial intelligence. Microsoft (NASDAQ: MSFT) stock has offered a total return of 150% over the last five years, outperforming the S&P 500's 108% return. The stock can beat the index again over the next five years due to the momentum in its cloud computing business.
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Microsoft's Azure enterprise cloud business is a key catalyst for its stock right now, mostly due to surging demand for AI cloud services. Growth in Azure was the primary contributor to Microsoft's cloud revenue growth last quarter, which grew 26% year over year to $49 billion. Total revenue grew 18% over the year-ago quarter, reaching nearly $78 billion.
This is impressive growth considering that Microsoft may have left some revenue on the table due to limited data center capacity. As more capacity comes online, Microsoft could see accelerating growth in its cloud business. Management said it is on track to increase total capacity by 80% this year.
The stock should continue to compound in value on par with underlying growth in the business. Analysts expect the company's earnings to grow at a compound annual rate of 13.5% in the coming years, which could lead to marginal outperformance over the S&P 500 by 2030. Microsoft's relatively low risk profile as a dominant subscription-based software business makes it one of the best ways to profit from AI while sleeping well at night.
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John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
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