My Top AI Growth Stock to Buy in May (and It's Not Even Close)

• Microsoft delivered impeccable quarterly results and reaffirmed its second-half fiscal 2025 capital expenditure guidance.

• The company reiterated its long-term optimism in the growth of AI and cloud computing.

• Microsoft has a highly reliable capital return program.

Like most megacap growth stocks, Microsoft (NASDAQ: MSFT) had been down big year to date due to a widespread sell-off, tariff turmoil, and recession fears. But Microsoft and other growth stocks have recovered in recent weeks.

On Thursday, Microsoft rocketed even higher in response to a monster third-quarter fiscal 2025 report and strong guidance. At the time of this writing, Microsoft has rebounded by so much that it is now positive on the year even though major indexes like the S&P 500 (SNPINDEX: ^GSPC) and Nasdaq Composite (NASDAQINDEX: ^IXIC) are still negative.

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Here’s why Microsoft is my top artificial intelligence (AI) growth stock to buy in May.

Microsoft blew quarterly expectations out of the water with a 16% overall increase in revenue, 14% increase in operating income, and 10% increase in diluted earnings per share.

Microsoft discusses guidance on its earnings call instead of including it in its earnings press release. So it takes a bit of deduction to determine how the guidance fits into the big picture. By taking the fourth-quarter fiscal 2025 revenue projections by segment (discussed on the call), we get the following full-year guidance.

Data source: Microsoft. YOY = year-over-year.

Microsoft’s results and guidance for the final quarter of fiscal 2025 put it on track to deliver excellent top-line growth as demand for AI and the cloud remains strong.

Microsoft said it expects full-year operating margins to be up slightly compared to fiscal 2024 even though its operating expenses and capital expenditures (capex) are on the rise.

Aside from the phenomenal results, arguably the biggest takeaway from the report was Microsoft’s decision to keep its foot on the gas with high operating expenses and capex as it accelerates AI investment and data center buildouts. On the earnings call, Microsoft reaffirmed its capex guidance from January and forecast higher sequential capex in the upcoming quarter. In January, Microsoft reaffirmed its plan to spend $80 billion on AI data centers in 2025.

Microsoft continues to leverage AI across its business units, from copilots for its Microsoft 365 suite and GitHub to Azure AI and more. Microsoft 365 Copilot users are up threefold year over year, and it now has a staggering 15 million GitHub Copilot users, a fourfold increase in just one year.

However, Microsoft isn’t a pure-play AI company. For example, non-AI cloud services were the standout for Azure this quarter. Azure AI services help customers build apps using AI while non-AI services include compute, storage, database, networking, analytics, and security. Microsoft’s excellent cloud results show that Azure growth isn’t solely due to new AI tools.

Another key takeaway from the earnings call was commentary on capex spending. Microsoft recognizes that investors want to see capex translate into tangible results so that the spending makes sense. But it will get harder to separate AI workloads from non-AI workloads. What really matters is that work is done on the same cloud and that the cloud can handle changing customer needs. In other words, Microsoft is justifying investments in capital-intensive graphics processing units, central processing units, storage, and networks by assuming that workloads on the cloud will grow, both AI and non-AI.

In the recent quarter alone, Microsoft opened data centers in 10 countries as it continues to improve data center efficiency and manage costs. Microsoft is making tangible improvements to data center design, hardware and silicon, systems software, and model optimization to lower costs and increase performance. So it isn’t just throwing capex at AI and hoping it works, it is spending money purposefully.

On the earnings call, an analyst asked how Microsoft would navigate a potential recession and the impacts of an economic slowdown on its business. Microsoft CEO Satya Nadella responded that the efficiency improvements of the cloud and the company’s integrated footprint from software-as-a-service to software infrastructure makes it well positioned to handle a recession. To quote Nadella on the call:

I think if you buy into the argument that software is the most malleable resource we have to fight any type of inflationary pressure or any type of growth pressure where you need to do more with less, I think we can be super helpful in that.

In addition to its strong business model and high margins, another advantage Microsoft has compared to other companies is its strong balance sheet. The company exited the recent quarter with $79.62 billion in cash, cash equivalents, and short-term investments — which is roughly double its $39.88 billion in long-term debt.

Even with its higher spending, Microsoft can still support its sizable capital return program. In the latest quarter, Microsoft returned $9.7 billion to shareholders through dividends and buybacks compared to $8.4 billion in Q3 fiscal 2025. The pace of buybacks has slowed as Microsoft has ramped up capex, however it continues to repurchase at least enough shares to offset stock-based compensation and avoid dilution.

Microsoft has also raised its dividend every year for 15 consecutive years. Its latest raise was a 10% increase, which is the growth rate investors have come to expect in recent years. Microsoft only yields 0.8%, but that’s mostly because its capital return program focuses on buybacks and dividends, not just dividends, and because the stock price has grown faster than the dividend growth rate — which compresses the yield.

Microsoft checks all the boxes for a growth stock to buy now. The company is leveraging AI across its diversified business segments and is a leader in the cloud — which continues to be a high-margin growth machine.

Microsoft is well positioned to endure an economic slowdown because it has the margins and the balance sheet needed to keep investing in long-term projects even if they take time to pay off. The company also has a highly reliable capital return program consisting of dividends and buybacks — providing another means for rewarding patient investors.

Add it all up, and Microsoft is an excellent foundational growth stock that you can confidently buy and hold through periods of volatility.

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Daniel Foelber 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.

My Top AI Growth Stock to Buy in May (and It’s Not Even Close) was originally published by The Motley Fool