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Artificial intelligence (AI) is one of the hottest tech megatrends in recent memory. And the excitement has encouraged investors to pour into industry leaders like Nvidia, which has soared by 206% year to date.

But the chipmaker isn’t the only game in town. Let’s discuss why Microsoft (NASDAQ: MSFT) could also be an ideal way to bet on the opportunity.

Why Microsoft?

Since its founding in 1975, Microsoft has become the world’s second-largest company, with a market cap of $2.5 trillion through its dominance of productivity software, the cloud, and personal computing. With revenue of $198 billion in 2022, it won’t be easy to move the needle for this tech giant.

That said, analysts at PwC expect AI to add roughly $16 trillion to the global economy by 2030, and this opportunity is big enough to unlock a new leg of growth for an already massive business.

AI’s full impacts will be spread across many different industries, and no one company will be able to control the whole thing. But Microsoft has worked hard to position itself as a leader in generative AI — a technology where computer systems create new content that can range from digital art to computer code.

The company established an early lead with a series of investments in OpenAI, the creator of ChatGPT. These investments give Microsoft a 49% stake in the start-up and a share of its profits. The move also allowed Microsoft to incorporate ChatGPT’s technology into a variety of products, including its search engine, Bing.

Keeping the competition at bay

While ChatGPT was the first generative AI platform to reach mainstream success, it is no longer the only name in town. Microsoft and its partner, OpenAI, now face competition from other big tech companies like Alphabet, which has built its own generative AI platform, Bard, and incorporated the technology into its Google search engine. While ChatGPT will enjoy name recognition and other first-mover advantages, a growing number of alternatives will diminish its moat.

Image source: Getty Images.

The good news is that Microsoft isn’t limited to consumer-facing search and chatbots. It also has an industry-leading portfolio of business productivity software (like Word, Excel, and PowerPoint), and it plans to implement OpenAI’s technology across its ecosystem.

In March, the company announced Microsoft Copilot, an AI that allows the use of natural-language prompts to create presentations, summarize documents, and analyze data within Office 365. This move could help boost the company’s growth while preventing it from facing disruption from rivals.

AI could also boost Microsoft’s cloud computing business, Azure. The company has made many of OpenAI’s models available on the platform, and management is confident that these efforts could net the company an additional $10 billion in annual revenue from independent developers who want to use its technology to create their own applications.

The valuation is attractive

While AI-related optimism has sent Microsoft’s shares up by 41% year to date, the company’s forward price-to-earnings (P/E) ratio of 30 still looks like a reasonable premium over the S&P 500 average of 26, especially when considering its leadership position in a burgeoning new industry.

Over the long term, Microsoft probably won’t grow as fast as Nvidia, which has a P/E of 43 and grew its most recent quarter’s sales by 101% compared to Microsoft’s 8%. But its established and diversified business model, coupled with a lower price tag, could make the stock a safer alternative for value-oriented investors.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.

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