This week will see several of the biggest companies in the world deliver their quarterly readouts. On Tuesday, once the bell rings to bring trading to a halt, tech giant Microsoft (NASDAQ:MSFT) will grab hold of the earnings baton and announce its fiscal fourth quarter results (June Quarter).
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It’s been a great time to be a Microsoft investor. The company has been at the forefront of tech’s charge this year with its stake in ChatGPT owner OpenAI, making it one of the AI stocks to own. To wit, the shares are up by 44% year-to-date.
Thing is, according to Goldman Sachs analyst Kash Rangan, it is an opportunity that is only starting to play out. Just look at the potential of its generative AI tool, Copilot, once it properly integrates into Microsoft 365.
“As Microsoft 365 Copilot will be launched into a base of +380mn users for $30/user/month, we size the TAM (total addressable market) at +$135bn long-term,” the 5-star analyst said. “We estimate Microsoft can recognize 15-30% of this opportunity by FY26, with the assumption of a mid- to late FY24 launch. We see accelerated adoption vs. the migration cycles of E3/E5 given the ubiquitous productivity expected.”
As enterprises’ are increasingly keen to add Gen-AI services, Rangan is convinced Microsoft Cloud (which mostly consists of Azure and Office) can keep on growing at a rate of +20% in the years ahead.
In F4Q23, Rangan anticipates Azure growth of 27% (in CC) yet given channel conversations indicate demand for new products (Azure OpenAI Services, GitHub Copilot) has surpassed expectations, Azure could yet deliver a ~100bps beat. For FY24, Rangan thinks, the bar for Azure growth could be in the 23-25% range, but should the macro improve, and Gen-AI-related spending sees a continued uptick, there might be room for “upward revisions.”
As for the F4Q23 numbers, Rangan is calling for revenue of $55.9 billion, up 8% year-over-year, compared to consensus at $55.4 billion, and for EPS to rise by 18% YoY to $2.63, also above the Street at $2.55.
Ahead of the print and on account of the “expanding M365 TAM,” that opportunity merits a new price target – the figure rises from $350 to $400, suggesting shares can climb 16% in the months ahead. Rangan’s rating stays a Buy. (To watch Rangan’s track record, click here)
The majority of analysts remain in Microsoft’s corner. Based on 31 Buys, 3 Holds and 1 Sell, the stock claims a Strong Buy consensus rating. Going by the $374.59 average target, there’s room for one-year upside of ~9%. (See Microsoft stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
