Microsoft (MSFT): Analyzing Investor Opportunities Amidst New Generative AI Tools

The enthusiasm for the transformative potential of generative artificial intelligence (AI) is mounting. Companies from various sectors are actively exploring its applications, be it enhancing worker productivity, facilitating communication with stakeholders, or streamlining operational processes to foster efficiency and growth.

Despite widespread adoption among other C-suite executives, many traditionally cautious CFOs hesitate to embrace generative AI. Concerns over return on investment (ROI) and cost containment persist, hindering their full engagement in leveraging this technology's potential benefits.

According to the CNBC CFO Council survey for the first quarter of 2024, only a third of respondents anticipate increased capital expenditures over the next year. Of this group, merely 7% intend to allocate funds toward new AI capabilities, ranking lower than other investment priorities like market expansion or facility development.

Yet, a suite of specialized tools tailored for CFOs and finance teams is emerging from various business software providers. Microsoft Corporation (MSFT) is at the forefront, launching Microsoft Copilot for Finance. The tool empowers financial professionals within Microsoft 365, offering AI-driven support for critical decision-making processes.

Cory Hrncirik, modern finance lead at MSFT, has emphasized the significance of leveraging generative AI to blend structured and unstructured data sets. He asserts that comparing data from different systems is “something every finance team on the planet does a lot of.”

Furthermore, MSFT’s Copilot drastically reduces the time spent on reconciliation tasks for thousands of financial planning and analysis professionals. Previously, individuals would allocate one or two hours weekly to this process, whereas with Copilot, the task now only demands 10 to 20 minutes.

MSFT’s commitment to advancing business applications through AI-driven solutions underscores its dedication to addressing challenges organizations face. Copilot for Finance represents a significant step forward in empowering finance professionals to navigate complexities and drive success in today’s dynamic business landscape.

Strategic Collaborations and Expansion Avenues

MSFT’s commitment to AI extends beyond individual projects, encompassing strategic collaborations to bolster its AI capabilities. One such venture is the proposed “Stargate” project with OpenAI, involving a $100 billion investment to construct a massive supercomputing cluster supporting advanced AI models.

For perspective, MSFT’s expenditure on building clusters for training OpenAI’s GPT-4 model exceeded several hundred million dollars. OpenAI, in turn, is currently developing a successor to GPT-4, likely named GPT-5, utilizing MSFT’s existing data centers.

In parallel, data security firm Rubrik is eyeing a New York Stock Exchange listing, aiming to raise $500 million to $700 million. Backed by MSFT, which has held a stake in Rubrik since 2021, the IPO underscores the company's interest in expanding its presence in data security.

Moreover, MSFT and NVIDIA Corporation (NVDA) have deepened their collaboration, integrating NVIDIA’s generative AI and Omniverse™ technologies into Microsoft Azure, Azure AI services, Microsoft Fabric, and Microsoft 365. The partnership aims to provide customers with comprehensive platforms and tools across the Copilot stack, facilitating breakthroughs in AI capabilities.

From introducing the GB200 Grace Blackwell processor to Azure to enhancing integrations between DGX Cloud and Microsoft Fabric, these initiatives underscore MSFT's commitment to empowering customers with radical AI solutions spanning hardware and software domains.

Upbeat Financial Results Serve as Evidence

In the fiscal 2024 second-quarter earnings release, MSFT reported a remarkable 33% surge in profit for the October-December quarter, propelled by substantial investments in artificial intelligence. The company's focus on AI within its cloud-computing unit drove significant growth, surpassing Wall Street expectations.

MSFT’s earnings per share for the quarter came in at $2.93, beating the consensus estimate of $2.77. Its revenue stood at $62.02 billion, surpassing analyst expectations of $61.13 billion and up 17.6% year-over-year.

In addition, the company's cloud-centric segment witnessed robust growth, with revenue climbing 20% year-over-year to $25.88 billion. Office Suite and LinkedIn revenue grew by 13% year-over-year to $19.25 billion, and the personal computing business, including Xbox, surged by 19% to $16.89 billion, notably bolstered by the addition of Activision Blizzard.

Jeremy Goldman, director of briefings at Insider Intelligence, has hailed MSFT as a frontrunner in the AI realm, predicting its potential to expand into digital advertising. His firm anticipates the company's worldwide ad revenues to reach $14.93 billion, reflecting a 12% increase this year.

Looking ahead, Wall Street expects MSFT's revenue to increase 15.3% year-over-year to $244.34 billion for the fiscal year ending June 2024. Moreover, the company's EPS is estimated to rise 19.2% from the previous year to $11.69. Furthermore, MSFT has topped the consensus revenue and EPS estimates in all four trailing quarters, which is impressive.

Bottom Line

With staggering market projections, artificial intelligence is poised to become the paramount Next Big Thing. Statista forecasts the AI market to hit approximately $305 billion this year and nearly $740 billion by 2030, although some skeptics argue it’s mere hype.

Notably, Wall Street analysts pinpoint MSFT as a major beneficiary of the AI surge. CEO Satya Nadella emphasized the company’s wholehearted embrace of AI, citing its integration across the entire data stack and its substantial productivity enhancements.

Wedbush tech analyst Dan Ives has raised MSFT’s price target to $500 from $475, citing the transformative potential of Copilot and the accelerating adoption of AI technology. He anticipates a significant increase in Azure cloud deal flow as AI applications proliferate throughout the enterprise landscape.

Ives predicts that 70% of MSFT's enterprise base will utilize AI-driven functionality within three years, fundamentally altering the company's trajectory. He estimates Copilot alone could contribute $25-30 billion to the company’s revenue by 2025, underscoring its pivotal role in its growth.

Concurrently, Bank of America Corporation (BAC) maintains a bullish outlook on MSFT, labeling it a “top pick” with a buy rating and a $480 stock price target. Also, Jefferies Financial Group Inc. (JEF) analyst Brent Thill echoes this sentiment, raising the price target to $550 and affirming MSFT as the leading AI player, poised to capitalize on transformative opportunities in infrastructure and applications.

Given these factors, MSFT emerges as a compelling investment choice with the potential for substantial returns amid the burgeoning AI landscape.