The Nasdaq Composite index hit its most recent high on Dec. 16, 2024, but the tech-laden index has turned in a forgettable performance so far this year. The result is largely due to the rising economic uncertainty in the U.S. thanks to the new administration's policies.
As it turns out, the index is down over 14% from its December high as of this writing. This puts the Nasdaq Composite in correction territory. A stock market correction happens when a major index declines in the range of 10% to 20%. There is a chance that this correction could continue thanks to the rising probability of a recession in the U.S. and a reduction in the economic growth forecast for the year.
It won't be surprising to see top artificial intelligence (AI) stocks dropping further following their recent pullbacks. AI stocks have taken a beating of late as investors have been looking to book profits amid the rising economic uncertainty. That's not surprising as companies benefiting from the proliferation of this technology witnessed a remarkable jump in their share prices over the past couple of years.
However, the global AI market is expected to grow at a remarkable rate in the long run thanks to the productivity gains that it is expected to deliver across multiple industries. McKinsey estimates that AI software and services could contribute $23 trillion annually to the global economy by 2040. That's why now would be a good time to take a closer look at one AI stock that could turn out to be a big long-term winner and seems worth buying during the ongoing correction.
This tech giant can step on the gas thanks to AI
Microsoft (MSFT -0.50%), the world's second-largest company, has lost 17% of its value during the ongoing Nasdaq correction. However, Microsoft is one of the best ways to play the AI software boom since it serves huge end markets that could supercharge its growth in the long run.
The biggest catalyst for Microsoft is the rapidly growing demand for AI services in the cloud. The tech giant's revenue in the Intelligent Cloud segment in the second quarter of fiscal 2025 (which ended on Dec. 31, 2024) increased at a healthy year-over-year rate of 19% to just over $25 billion. What's worth noting is that the revenue from cloud-based AI services grew at an incredible pace of 157% from the year-ago period.
NASDAQ: MSFT
Key Data Points
The growth in AI services revenue could have been higher, but Microsoft was unable to fulfill all of the demand thanks to capacity constraints. The good part is that the company is expanding its data center capacity "in line with both near-term and long-term demand signals." That is a smart thing to do considering that several customers have been turning to Microsoft to deploy AI services in the cloud, allowing the company to build a solid revenue pipeline.
Microsoft is offering a range of AI models on its Azure cloud platform from companies such as OpenAI and DeepSeek, which customers can use to build AI applications and agents. It is also offering industry-specific models from industrial giants such as Siemens, Rockwell Automation, Bayer, and others, making it easier for customers to integrate AI into their operations.
A solid revenue pipeline should lead to stronger earnings growth
The above discussion explains why Microsoft's commercial remaining performance obligations (RPO) jumped by an impressive 36% year over year in the previous quarter to $298 billion. RPO refers to the total value of a company's contracts that are yet to be fulfilled. The fact that this metric increased at triple the pace of Microsoft's actual top-line growth last quarter suggests that it is getting more contracts than it can fulfill.
So, as Microsoft continues to build up more capacity, it should be able to deliver stronger revenue and earnings growth in the long run. Additionally, the market for cloud-based AI services is expected to clock an annual growth rate of almost 40% through 2030, indicating that Microsoft could clock remarkable growth in this segment for a long time to come.
Not surprisingly, analysts are expecting an uptick in Microsoft's earnings growth following an estimated jump of 12% in the current fiscal year.
MSFT EPS Estimates for Current Fiscal Year data by YCharts
The huge opportunity in the cloud AI market could help Microsoft sustain its impressive earnings growth momentum for a much longer time. But even if the company manages to deliver $17.65 per share in earnings after a couple of fiscal years, it could deliver robust upside thanks to its attractive valuation.
Microsoft is trading at 25 times forward earnings right now, which makes it an attractive AI stock to buy for the long haul amid the correction, as it is cheaper than the Nasdaq-100 index's earnings multiple of 29. Assuming this tech stock trades in line with the index's earnings multiple after a couple of fiscal years and hits the consensus earnings estimate mentioned above, its stock price could jump to $512.
That would translate into 36% gains from current levels. However, don't be surprised to see Microsoft stock clocking stronger gains going forward. It seems capable of outpacing consensus earnings estimates, which could lead the market to reward it with a premium valuation that could result in stellar long-term upside.
