Through its partnership with OpenAI, the brains behind ChatGPT, Microsoft (NASDAQ:MSFT) has cemented its position as a leading player in the GenAI arena. Yet, according to Morgan Stanley analyst Keith Weiss, Microsoft’s presence in the space is about to get even better.
“Strong positioning against key secular themes within software, against a backdrop of improving overall IT spending within a well executing Microsoft frames the equation for durable high-teens EPS growth ahead, a level of earnings growth still not reflected in the P/E multiple,” the 5-star analyst opined.
However, those looking for concrete evidence of Generative AI’s success, namely a quantification of its contribution – specifically within M365 Copilot and Azure – might be let down by the upcoming FQ2 readout, with Weiss saying management is likely to turn to a “more qualitative discussion of the innovation cycle.” “That said,” Weiss goes on to add, “we remain convinced investor patience will be rewarded.”
Considering the absence of any guidance regarding its impact in Q2, management does not seem likely to single out AI’s contribution to Azure growth for the time being. As such, Weiss has turned to the banking firm’s recent survey findings for validation of the opportunity ahead.
A CIO survey conducted in January has confirmed the anticipation of increased growth in IT budgets in 2024. This is supported by the trends seen in Generative AI and Public Cloud, and the results show that Microsoft stands out as particularly well-positioned to capitalize. 63% of CIOs expressed their intention to utilize Microsoft Generative AI offerings in the next 12 months, and 37% are planning to employ Azure OpenAI Services, an increase from the 27% seen in the second quarter of 2023.
As for investor expectations, discussions indicate an expected Azure growth beat of around 1-2% in FQ2, with expected year-over-year growth of around 27-28%, aligning with the growth seen in FQ1.
Taking the GenAI opportunity ahead into consideration, Weiss thinks a price target hike is due. Weiss’ objective moves from $415 to $450, representing upside of 11% from the current share price. The analyst’s rating stays at Overweight (i.e., Buy). (To watch Weiss’ track record, click here)
MSFT is that rare beast – a stock with plenty of coverage where everyone is in agreement. It has garnered 33 analyst reviews over the past 3 months – all Buys – naturally making the consensus view here a Strong Buy. The average target currently stands at $438.55, implying the shares will deliver returns of 8% over the one-year timeframe. Don’t be surprised if analysts scramble to raise their targets soon. (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.
