Microsoft Corp. has given investors some cautionary words amidst a significant surge in its stock. However, analysts remain undeterred, expressing confidence in the company's potential for massive growth in the future.
Gradual Revenue Generation
Chief Financial Officer Amy Hood acknowledges that making money from AI services will be a gradual process. Despite this, analysts believe that Microsoft has a tremendous opportunity ahead in this field.
Massive Potential Revenue
Following the company's latest earnings report, SVB MoffettNathanson analyst Sterling Auty stated that Microsoft is currently developing various products for general use. These products, such as the Copilot productivity offering for the security market, have the potential to generate substantial revenue.
Modest Outlook
Microsoft's management maintains a modest outlook for adoption, leading to potential positive surprises in terms of revenue growth. Auty believes that this could result in significant beats and raises throughout fiscal 2024.
Conservative Approach
Despite underwhelming investors with its fiscal first-quarter forecast, Evercore ISI's Kirk Materne commends Microsoft for taking a conservative view on the timing of AI revenue. He suggested that investors should take advantage of the dip in Microsoft shares, as the company's setup remains compelling.
Promising Future
Materne also highlighted that Azure growth is showing signs of bottoming out, indicating a positive future for Microsoft. Additionally, the Copilot monetization opportunity is expected to grow over the course of the year.
In light of these factors, Materne has given Microsoft an outperform rating with a target price of $400 per share.
Microsoft's Strong Position in the Gen AI Market
Microsoft's position in the commercial market makes it uniquely positioned to benefit from the adoption of generative AI (Gen AI). Despite lacking clarity on the timing of growth levers in the latest report, Derrick Wood of Cowen & Co. remains optimistic about Microsoft's long-term prospects, maintaining an outperform rating and setting a target of $390. Wood believes that as the Gen AI cycle matures, new growth levers will further strengthen the company's position, leading to beat and raise momentum.
While Microsoft expects an increase in capital expenditures in each quarter of the new fiscal year, Bernstein's Mark Moerdler sees this as a positive sign. Moerdler believes that Microsoft's willingness to invest in itself reflects its confidence in future growth, stating that the company must have a line-of-sight to a significant increase in cloud revenue. With Hood at the helm, Moerdler feels assured that Microsoft's management is on top of things.
Although Guggenheim's John DiFucci acknowledges the potential benefits of AI for Microsoft, he expresses caution due to certain concerns. DiFucci points out that the core technology behind AI is open source, and the high cost of running it could explain the relatively high price of Microsoft 365 Copilot ($30/month). However, DiFucci admits that it would take more time to fully understand the situation and notes that the market has already drawn a positive conclusion.
DiFucci has set a price target of $232 for Microsoft stock.
