Analyst survey predicts big AI upside for Microsoft ahead of earnings

Published 9:15 am Wednesday, January 24, 2024

By Rob Lenihan

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They called 2023 “the Year of AI.” Microsoft even dedicated an entire page of its website to its work with artificial intelligence.

There’s a story about a partnership between Microsoft South Africa and Youth Employment Service that will provide AI training to 300,000 young people.

Another story covers the Microsoft AI School by Simplon, which is part of “Microsoft’s efforts to bring more diversity to the digital workforce and to fill significant labor and gender gaps.”

Clearly, Microsoft thinks AI is a big deal that could move the needle in 2024. According to a Morgan Stanley Survey, Microsoft’s customers agree.

Microsoft’s shares have skyrocketed as AI demand has accelerated.

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Gen AI is a growing business

Microsoft (MSFT) – Get Free Report is one of the so-called “Magnificent 7”, a group of tech companies, including Apple, Amazon (AMZN), and Nvidia (NVDA) that were responsible for around two-thirds of the S&P 500’s overall gains last year.

Much of these gains were tied to the hype around new artificial intelligence-related technologies and their impact on both big tech earnings and the broader economy.

Microsoft, a leader in generative AI products and a key investor in ChatGPT creator OpenAI, briefly surpassed Apple (AAPL) – Get Free Report as the world’s most valuable company and is approaching a market cap of around $3 trillion.

Microsoft is scheduled to report fiscal second-quarter results on Jan. 30 and a consensus of analysts expects the company to earn $2.76 per share on $61 billion in revenue

A year ago, Microsoft reported earnings of $2.32 per share and revenue was $53 billion. Revenue in Microsoft’s Intelligent Cloud segment was particularly robust, rising 18% to $22 billion.

The unit, which includes the Azure public cloud, Windows Server, SQL Server, Nuance and Enterprise Services, is a prime beneficiary of AI, given many use Azure to train and operate their AI applications.

Azure and other cloud services sales, which Microsoft does not report in dollars, grew by an eye popping 31%.

The company traded at around $248 per share back then. Today, Microsoft’s stock price is nearly $400, largely because AI spending has continued to drive Microsoft’s results higher.

The surge in AI spending, particularly the company’s generative AI product is a big reason why Morgan Stanley analyst Keith Weiss’ decided on Jan. 23 to raise his price target on Microsoft to $450 from $415 a share.

A survey of chief investment officers by Morgan Stanley found that 68% plan to adopt Microsoft’s generative Al solutions at some point in the next year, Weiss said in a note to investors.

Microsoft’s generative Al products, such as Azure OpenAl Service and Microsoft 365 Copilot, the company’s chatbot, are marketed to help businesses transform their product and service portfolios and leverage its benefits.

While investors might not see much evidence of this during the fiscal second-quarter, the analyst said that its contributions will be made apparent by year’s end.

Analyst cites ‘growing AI tailwinds’

Last week, analysts at TD Cowen raised their price target for Microsoft to $425 from $390 per share while maintaining an outperform rating on the stock.

“We expect Azure above high-end of guide, with encouraging Cloud data points including third party data and field checks showing stronger new bookings trends and growing AI tailwinds,” analysts said, according to Investing.com.

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TD Cowen also said “they expected “continued beat & raise momentum, especially w/ more favorable FX (foreign exchange market).”

The second half of the 2024 setup, the analysts said, “is attractive with firmer demand, stable PC environment, building AI catalysts & easing comps.”

Exane BNP Paribas was also bullish on Microsoft as analysts upgraded the company to outperform from neutral with a price target of $471.

And Microsoft also earned a spot on Citibank’s list of top 20 large-cap stocks, with Morningstar analyst Dan Romanoff saying that the company “is one of two public cloud providers [along with Amazon] that can deliver a wide variety of software solutions at scale.”

Microsoft has run into some challenges with its artificial intelligence efforts.

Last month the New York Times (NYT) – Get Free Report said that it had sued both Microsoft and OpenAI for copyright infringement, accusing the tech firms of using the Times’ journalism to develop their generative AI products without permission or compensation.

OpenAI said in a statement that it was “hopeful that we will find a mutually beneficial way to work together, as we are doing with many other publishers.”