Microsoft blazed the trail for tech when Windows and Internet Explorer emerged as critical tools of the web revolution 30 years ago. Now, the tech behemoth is eyeing a leadership role in the latest hot technology trend: AI.
And Wall Street is paying close attention.
The stakes are high for Microsoft stock. Generative AI is tech's new battleground. And the stakes are particularly high for cloud computing service providers like Microsoft, which is making big bets on the trend. In fact, many Wall Street analysts believe artificial intelligence will fuel the next growth story for the Redmond, Wash.-based company, with the potential to propel Microsoft to a new era of industry dominance.
The big test will come next year when Microsoft takes the wraps off a more extensive AI arsenal. The company is taking its enterprise Copilot generative AI products out of beta testing, giving customers access to more powerful technologies for operating a business, including AI-equipped versions of widely used tools like Word, Excel, PowerPoint, Outlook and Teams. Microsoft announced last month that Microsoft 365 Copilot, which includes Office, will reach general availability for enterprise customers on Nov. 1.
The software giant also appears to be making a move on the hardware front. Microsoft is reportedly rolling out its own AI chip, addressing a critical area of the artificial intelligence market dominated by semiconductor giant Nvidia.
Microsoft's AI offensive is drawing attention given its recent history, said TD Cowen analyst Derrick Wood.
"They haven't led a tech cycle in a long time," he told Investor's Business Daily. "Their success in cloud computing was definitely on the backs of AWS (Amazon Web Services), which was the big disrupter. But they played very good catch-up in the cloud infrastructure and SaaS (software-as-a-service) market."
Microsoft Stock Pulls Back
The company's advances around generative AI have boosted Microsoft stock this year. Shares surged to a record high of 366.78 on July 18 ahead of the company's fiscal fourth-quarter earnings report. But then they began a retreat, trading under 310 in late September.
Eight months into the AI frenzy triggered by ChatGPT's introduction last November, Microsoft had been making headlines with its aggressive artificial intelligence push. But Microsoft executives offered a more nuanced view of its AI strategy.
When it announced earnings July 25, Microsoft CEO Satya Nadella touted the heightened interest in AI, telling analysts, "Organizations are asking not only how — but how fast — they can apply this next generation of AI to address the biggest opportunities and challenges they face — safely and responsibly."
"We remain focused on leading the new AI platform shift, helping customers use the Microsoft Cloud to get the most value out of their digital spend, and driving operating leverage," Nadella added in a statement.
But Chief Financial Officer Amy Hood offered a more cautious view of AI's impact on the company's financials on Microsoft's earnings call.
"Even with strong demand and a leadership position, growth from our AI services will be gradual as Azure AI scales and our Copilots reach general availability dates," she said on a July 25 conference call with analysts. Azure is Microsoft's cloud computing platform and Copilots are the generative AI offerings across its product portfolio.
Lately, Microsoft stock has been trying to form a double-bottom base with a potential buy point of 340.86. Shares closed Friday at 327.73.
Microsoft could not immediately be reached for comment.
Embracing OpenAI As Artificial Intelligence Race Begins
Still, investors clearly have grown excited about Microsoft's AI moves.
The frenzy began in January when the company announced a stunning investment, reportedly worth $10 billion, in OpenAI. The startup triggered the current frenzy over artificial intelligence when it released the popular chatbot ChatGPT late last year. OpenAI also developed the image generator Dall-E. Microsoft previously had invested in OpenAI in 2019 and 2021.
Generative AI uses vast amounts of data combined with massive computing power to enable users to create high-quality content — including articles, essays, images, videos and music. The technology also allows users to write software code.
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Microsoft's alliance with OpenAI is expected to beef up its position in an important arena, enterprise cloud. Microsoft is providing its Azure cloud computing infrastructure for OpenAI. Microsoft also reportedly has taken a 49% stake in the buzzy startup.
Microsoft's aggressive AI push also turned the spotlight on its rivalry with its two major cloud rivals, Amazon and Google. Amazon is the big gorilla of the cloud market, while Google is widely considered a major AI player.
Microsoft's AI offensive had a noticeable impact on Google — and its investors. Google rattled Wall Street early this year when the tech giant unveiled a flawed response to Microsoft's high-profile AI push.
When Google rolled out a new AI chatbot called Bard in February, the marketing campaign featured a promotional video with incorrect information. The blunder spooked investors, causing Google parent Alphabet's stock to plummet. The sell-off wiped out $100 billion in market value in a single day. Alphabet stock later bounced back, and is up more than 55% this year.
When Will Generative AI Services Roll Out?
Meanwhile, Microsoft moved quickly to build on its early artificial intelligence lead. Since announcing its OpenAI partnership, Microsoft has added generative AI capabilities to its Bing search engine and Edge web browser. The company also is adding Copilot-branded AI tools to its Office productivity software suite which would make it easier for users to automate and simplify tasks.
Microsoft touted impressive new capabilities when it unveiled the product in March: "You can give it natural language prompts like 'Tell my team how we updated the product strategy,' and it will generate a status update based on the morning's meetings, emails and chat threads."
Copilots for Office 365 products including Word, Excel, PowerPoint, Outlook and Teams are currently in beta testing. Microsoft will likely roll out those services by region to make sure it has enough computing capacity to meet demand, JPMorgan analyst Mark Murphy said in a note to clients.
But Murphy downplayed the potential impact of the planned rollout. "While we are encouraged by the updated timeline on the release of some of its AI products, we continue to believe that the potential revenue uplift from these products could be modest in the immediate near term, thus requiring some patience," Murphy said. He rates Microsoft stock as overweight with a price target of 385.
Further, Microsoft is bound to encounter stiff competition, as cloud software firms — including Amazon.com, Alphabet unit Google, Adobe, Oracle and Salesforce.com — move to boost their AI arsenal.
However, Microsoft enjoys a key advantage: a huge installed base of users, including 1.2 billion Office users worldwide. That's partly why analysts like Murphy are upbeat about Microsoft's longer-term prospects in generative AI.
"Our survey work continues to indicate Microsoft is establishing an early, commanding lead in GenAI mindshare," he said.
Software Giant 'Flooded' With AI Inquiries
This optimism was underscored at Microsoft's Envision conference in New York City last month.
"Microsoft stated that it is being 'flooded' with Gen AI inquiries and product suggestions, as organizations look to weave this emerging technology throughout their infrastructure," Mizuho Securities analyst Gregg Moskowitz said in a note to clients. He rates Microsoft stock as a buy with a price target of 420.
"Notwithstanding a more difficult operating environment, we remain confident that Microsoft's growth opportunities over the medium-term and beyond are greater than many realize, and this includes significant generative AI monetization," Moskowitz said.
The company is offering its Microsoft 365 Copilot, including the Office apps, at $30 per user per month for commercial customers. Currently just 600 enterprise customers are testing the product, but "thousands more" are on the wait list, Moskowitz said.
One analyst cited a potential drawback: pricing. Microsoft 365 Copilot costs 50% more than what many customers already pay for the Office suite, TD Cowen's Wood said. That makes the product more expensive than what most industry watchers had expected, which could become an issue at a time when enterprise information technology budgets are constrained, he added.
"Everybody's got an AI product to sell and there's not money sloshing around everywhere," Wood said. "You are going to have to show real value, real tangible ROI (return on investment), changing workers' productivity in a very meaningful and measurable way. That's going to take time."
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A Boost From GitHub
Yet Microsoft's push to offer AI-driven productivity appears to be getting a boost from its GitHub Copilot product for software developers, which is already on the market.
At Envision, Microsoft announced that GitHub Copilot has driven a roughly 35% improvement in developer efficiencies at Microsoft. The product also is driving significant developer improvements for its customers. For example, GitHub Copilot can rewrite and improve code in less than 90 seconds, Microsoft said.
"It's really taken the programming world by storm," Wells Fargo analyst Michael Turrin told IBD. "Everyone we speak with on the engineering side or the technical leadership side will say 'I can't imagine coding without this going forward.'"
GitHub Copilot enables users to create templates of software code and debug software programs. "That's the best example of Microsoft monetizing (generative AI) and having something that users are delighted with," Turrin said. Microsoft bought GitHub in 2018 for $7.5 billion.
Wood of TD Cowen concurs. "When you're talking about developers writing code and all the documentation that you have to do in that workflow, if you can automate some of the code writing and most of the documentation, you save 30% to 50% in productivity enhancements," Wood told IBD. "That's pretty measurable."
Microsoft also is seeing strong demand for its new Security Copilot, Mizuho's Moskowitz said. That AI-based tool will allow users to quickly detect and respond to cybersecurity threats and better understand the threat landscape. Early access for Security Copilot is slated for this fall.
In addition, Microsoft has 22,000 customers in preview for Microsoft Fabric, its new comprehensive data analytics platform. Microsoft Fabric is set for general availability before year-end.
AI Revenue Forecast For Microsoft Stock
Goldman Sachs analyst Kash Rangan said he came away from the Envision conference confident that Microsoft is on the right path with AI, which represents a $10 billion revenue opportunity for the company, he said in a note to clients. Rangan has a buy rating on Microsoft stock with a price target of 400.
Jefferies analyst Brent Thill, who also has a buy rating on Microsoft stock with a price target of 400, said in a note to clients that he sees AI Copilot driving revenue in calendar 2024, when the product is expected to reach commercial availability.
Microsoft has predicted a more significant contribution from artificial intelligence in the second half of its fiscal year, which ends in June.
The tech giant views AI as the "next potential big technology shift for the company," Wells Fargo's Turrin said. For now, it's a matter of managing investor expectations, which Wood of TD Cowen said "are high for near-term monetization." "There's been some frustration that this is taking longer than anticipated," he added.
The potential impact of Microsoft's AI offensive could become clearer when the company reports fiscal first-quarter earnings in late October. Microsoft is also expected to unveil more AI news at its Ignite conference Nov. 14-17 in Seattle.
Follow Patrick Seitz on X, formerly Twitter, at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
