Microsoft (MSFT) shares hit a fresh record high Thursday, valuing the tech giant at nearly $2.6 trillion, as its early-mover advantage into AI technology looks to challenge Apple's (AAPL) place as the world's most valuable company.
Microsoft stock has added around $770 billion in value so far this year, and alongside Nvidia has become one of the hottest tech names in the market, since unveiling a $10 billion investment in OpenAI, the maker of the AI-powered ChatGPT search engine tool, in early January.
The group has touted the potential of ChatGPT, a tool that uses human language to process instructions and which is being embedded in the tech group's also-ran search engine Bing, to close the gap on market leader Google, the eponymous lead product of parent company Alphabet (GOOGL) .
Investors are betting that AI adoption will help Microsoft -- which generated just $3.2 billion in search revenue last year -- challenge the market dominance of Google, which churned around $43 billion.
D.A. Davidson analyst Gil Luria has estimated that Bing, which has a small 3% market share of global search, will generate an extra $2 billion in revenue for every point of share it takes from Google, which has an estimated 91%.
Microsoft is also looking to embed OpenAI's technology into its other business units, such as More Personal Computing, which hosts its Windows product, and Productivity and Business Processes, where it places its Office 365 platform, through its use of so-called Copilots.
CFO Amy Hood, in fact, said in a recent presentation that generative AI will be "the fastest growing $10 billion business in our history". Others suggest it could be "Windows 95" moment in which Microsoft establishes leadership in "the most transformational technology we have seen since the Internet started to take shape", according to Wedbush analyst Dan Ives.
"While this newly released artificial intelligence reflects not only a significant leap in technological capabilities, it also reflects an immense monetization opportunity amongst the many industries as we see human-like artificial intelligence in its early stages," Ives said. "We believe that Microsoft is in a unique position to gain share in the cloud market that could expand Redmond's total addressable market around cloud by 35%-40% over the coming years."
Microsoft shares were marked 3.35% in mlate-day Thursday trading to change hands at $348.63 each, a move that would extend the stock's year-to-date gain to around 47%. The stock hit a fresh all-time high of $349.34 each earlier in the session. Its all-time closing high is $343.11, recorded in late November of 2021.
Microsoft's market value of around $2.57 trillion sits just 13.6% south of Apple's and nearly $1 trillion ahead of Alphabet.
The group is also powering ahead with profits from its established business lines, including its Intelligent Cloud unit, even amid slowing revenue growth in its flagship Azure product.
Microsoft said in late April that Azure sales rose 27% from last year over the three months ending in March, missing Street forecasts and slowing from earlier gains in the mid to high 40-percent range as companies continue to pull back on digital infrastructure spending.
Overall group revenues, however, rose 7.2% to $52.9 billion for Microsoft's fiscal second quarter, coming in well ahead of analysts' estimates of a $49.36 billion tally.
Intelligent Cloud revenues were pegged at $22.08 billion, against ahead of the Street's $21.26 billion forecast and up 22% from the same period last year.
Microsoft's adjusted earnings rose 10.4% from last year to $2.27 per share, just ahead of the Street consensus forecast of $2.23 per share. Net income rose 9% to $18.3 billion.
Looking into the final three months of its fiscal year, which ends in June, Microsoft said it sees Intelligent Cloud revenues of between $23.6 billion and $23.9 billion, implying an 8.2% sequential growth rate.
Still, AI looks like the most exciting driver of mid and longer-term growth, with Copilot adoption in Office 365 and Windows, alongside market share gains for Bing, potentially generating annual revenues of $100 billion by 2027.
CFRA analyst Angelo Zino, who recently lifted his price target on Microsoft to by $40, to $370 per share, also sees see Ffurther upside to estimates as new AI capabilities emerge across Microsoft's ecosystem of products."
"We expect more clarity on pricing in the coming months, with Copilot in Excel, Teams, etc. to drive a greater price per seat/month (productivity enhancements and infrastructure costs support higher prices), while the emergence of cross-app intelligence also represents an opportunity to extract greater value for users," Zino said. "We see revenue accelerating in the Sep-Q, supported by cloud growth as well as easier comparisons, while incremental AI sales opportunities are seen through FY 25."
