Single-quarter market value increases by $1 trillion: Why is Microsoft Corporation (MSFT.US)'s AI story gaining market favor again?

Title context: Single-quarter market value increases by $1 trillion: Why is Microsoft Corporation (MSFT.US)'s AI story gaining market favor again? Text: As the third quarter came to a close, Microsoft Corporation (MSFT.US) recorded its best quarterly stock performance since 1998. From July to September, Microsoft Corporation's stock price rose 37.5%, adding $1 trillion in market value. Against the backdrop of the tech-heavy Nasdaq 100 Index rising only 0.4% over the same period, Microsoft Corporation became the fifth-best performer in the index. Wall Street is betting that as Microsoft Corporation's position in the field of artificial intelligence continues to improve, the stock is poised to keep rising. Chad Morganlander, senior portfolio manager at Washington Crossing Advisors and a long-time holder of Microsoft Corporation, said that after a period in which its messaging was not clear enough, Microsoft Corporation has become clearer and more concise about how to monetize capital expenditures and benefit customers. Much of Microsoft Corporation's rally this round came from its earnings report released at the end of July. The report showed that, driven by strong AI demand, Microsoft Corporation's cloud business posted its fastest growth in four years. The day after the earnings release, Microsoft Corporation's stock surged 16%, its best single-day performance since October 2008, adding $450 billion in market value. The report eased market concerns about whether Microsoft Corporation's massive AI investments could deliver better growth. Compared with companies such as Alphabet, Amazon.com, Inc., and Meta that have also invested heavily in AI, Microsoft Corporation's financial performance was more encouraging - among the four companies, Microsoft Corporation was the only one whose annual free cash flow had not yet turned negative. Morganlander said: "Microsoft Corporation demonstrated a clear path to AI profitability. As a company that keeps investing but has not fallen into losses, it looks like the most mature one in the room." The strong rebound in Microsoft Corporation's stock price is especially striking because market sentiment reversed extremely quickly. June was Microsoft Corporation's worst month since 2000, when investors questioned the company's spending and the overall prospects of software companies in the AI world. But since then, industry concerns have eased somewhat, and investors have been encouraged by Microsoft Corporation's efforts to turn the Copilot AI assistant into a product for enterprise customers. Morganlander said: "The market still has concerns about a 'SaaS doomsday,' but Microsoft Corporation seems less vulnerable to these problems. At the same time, people are impressed by Copilot's adoption and integration." However, although this quarter's gains pushed Microsoft Corporation into positive territory for the year, its 6.1% year-to-date gain still significantly lags the Nasdaq 100 Index's 20% gain. JoAnne Feeney, portfolio manager at Advisors Capital Management, said: "Microsoft Corporation surged this quarter because people made a mistake. Investors realized they had misunderstood the company's potential, so a lot of the rally was just a correction of that mistake." Even so, rising optimism has made Microsoft Corporation a Wall Street favorite. Analysts are bullish, with only 3 not giving a buy rating and none giving a sell rating. The average analyst target price implies that Microsoft Corporation's stock price will rise about 11% over the next 12 months. Last week, Stifel upgraded Microsoft Corporation to buy, with analyst Brad Reback saying Microsoft Corporation has "clearly reached a turning point" and arguing that the stock's momentum should continue in the second half of the year. He is "increasingly comfortable with the company's ability to sustain mid-to-high-teens revenue growth." Adam Wood of Morgan Stanley expects Microsoft Corporation's total return over the next year to be about 20%, citing its long-term growth potential and the company's recent decision to raise its dividend. He wrote in a September 16 report: "Combined with high-teens earnings per share growth, this supports Microsoft Corporation in achieving durable high-teens total returns, constituting an attractive risk-reward ratio." On earnings expectations, Microsoft Corporation's revenue is expected to grow 18% in fiscal 2027, roughly flat with fiscal 2026; Wall Street expects revenue growth to reach 21% in fiscal 2029. On earnings per share, growth is expected to be about 11% this fiscal year, below the nearly 32% growth in fiscal 2026, but is expected to approach 19% in fiscal 2028 and reach 21% in fiscal 2029. On valuation, Microsoft Corporation's stock trades at about 25 times expected earnings over the next 12 months, which is not cheap, but below its 10-year average of 27 times. Among the largest tech stocks by market value, only Apple Inc. has a higher valuation. Feeney said: "Some people want to see more Copilot adoption or more features, but adoption momentum is still accelerating, and some recent announcements have also been positive. Still, Microsoft Corporation needs to keep delivering results."