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One of This Year's Top-Performing Dow Stocks Could Continue Its Hot Streak in 2024 – The Motley Fool

of Dow Jones Industrial Average Both are underperforming Nasdaq Composite And that S&P500 But it's by no means the fault of the Dow's tech stocks.

As of this writing, the top four Dow stocks so far this year have all been tech stocks. sales force Year-to-date (YTD), it's up 89%. intel It has increased by about 59%, microsoft (MSFT 0.88%) 55% increase apple This is an increase of approximately 49%.

Microsoft has taken the market by storm thanks to the megatrend of artificial intelligence (AI). As with most trends, there are many opportunities to invest in AI. But there's also a lot of hype that could be more risk than potential reward.

Unlike other AI companies that tout hypothetical benefits, Microsoft has implemented AI and is seeing results in the real world as we speak. Here's why Microsoft is the AI ​​stock to buy now, and why it could have another great year in 2024 after its historic performance in 2023.

Image source: Getty Images.

Integrate AI into proven solutions

AI was definitely the theme of Microsoft's fiscal 2024 first quarter earnings announcement in late October. There's a good reason for that.

When it comes to AI, Microsoft has the best opportunity in the short and long term. The near-term opportunity is to integrate AI into existing B2C and B2B solutions. This essentially makes products and services more useful, justifying higher subscription prices and increased adoption. Long-term opportunities include honing the power of AI across existing products, gaining significant advantages over competitors, and developing entirely new solutions.

A clear example of how AI is improving existing Microsoft solutions is Microsoft Copilots. CoPilot is a generative AI that integrates into existing applications. Generative AI like ChatGPT uses text, images, media, and language models to create new content. For example, there's Microsoft Copilots for Word, PowerPoint, and Excel. The Microsoft Edge web browser has Copilot. There's also his Copilot for the software development app GitHub.

Microsoft is delivering results

Releasing a new AI tool means little if people don't use it. But the data shows that co-pilots are having an immediate impact. Here's what Microsoft CEO Satya Nadella had to say about his GitHub Copilot during the company's fiscal 2024 Q1 earnings call:

GitHub Copilot increases developer productivity by up to 55% while helping developers stay in the flow and bring back the fun of coding. We have over 1 million paid Copilot users, over 37,000 organizations subscribe to his Copilot for business, up 40% quarter-on-quarter, and we're gaining significant traction outside of the US. This quarter, we added new features to GitHub Copilot Chat. This is already used by both digital natives such as: ShopifyNot only major companies such as maersk PwC significantly increases software developer productivity. The number of developers using GitHub has quadrupled since the acquisition five years ago.

Microsoft has an audience that acts as a feedback loop to determine whether their solutions are useful. Too often, technology companies spend too much time building the perfect solution instead of ensuring that the solution gets noticed and used. Microsoft is unique in that it is exposed to a variety of users with different skill sets and needs. The needs of a Microsoft Word user are very different from those of a developer using GitHub or a gamer using Xbox to play one of his many game franchises owned by Microsoft. . Microsoft's cloud business and Azure require different AI usage and tools than other products. The list goes on.

The point here is that Microsoft has ways to monetize AI in all the activities it already does, without considering the new markets and products that Microsoft develops organically or enters through acquisitions. There are ways to extract growth from existing solutions. Nadella said it well in his keynote at Microsoft Ignite 2023:

We're entering this exciting new phase of AI, where we don't just talk about AI as a new and interesting technology, we're talking about all the realities of making products, deploying them, making them safer, making them more productive in the real world. going into details. world problems. And that's the most exciting thing for all of us builders. We are at a tipping point. This is clearly the era of the co-pilot.

Tolerance of error

Microsoft not only has a set of solutions that can easily integrate AI, but it also has the cash flow needed to fund growth and absorb mistakes. In fiscal year 2023, Microsoft generated free cash flow (FCF) of $59.5 billion, spent $20.4 billion on stock repurchases, and $19.8 billion on dividends. When a company has limited growth opportunities, stock buybacks are a great way to reduce the number of outstanding shares and increase earnings per share. However, Microsoft has plenty of opportunities for growth, so reducing share buybacks and devoting more FCF to growth is a card Microsoft can play if needed.

Meanwhile, the company is generating more FCF than it needs to support its massive share buyback and dividend program. And to top it all off, the company has more cash and cash equivalents than debt on its balance sheet. So if an acquisition opportunity arises, Microsoft can rely on its balance sheet to make it happen.

Reliable AI stocks

Microsoft is the perfect medium-risk, high-potential reward AI stock. I say medium risk rather than low risk because of Microsoft's high valuation.

To be sure, there are plenty of riskier smaller companies that could easily outperform Microsoft stock. But no company has the existing market position, the opportunity to integrate AI into existing operations, the deep pockets, or the financial position of Microsoft. Microsoft can afford to make mistakes and, more importantly, take risks where other companies cannot. It also has unparalleled influence over consumers and the industry. In this vein, Microsoft has as close to a crystal ball as it gets when it comes to predicting what customers will and won't want from AI.

Microsoft is not a cheap stock. However, the company has what it takes to grow revenue and support a higher valuation. Because of this, Microsoft is likely to continue winning the market in his 2024 and for years to come.

Daniel Felber has no position in any stocks mentioned. The Motley Fool has positions in and recommends Apple, Microsoft, Salesforce, and Shopify. The Motley Fool recommends Intel and recommends the following options: Long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short February 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.

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