Microsoft (MSFT) shares extended gains Wednesday after the tech giant laid out a bullish case for its new AI investment drive and suggested the revamp of its Bing search engine could offer a significant challenge to Google's dominance in the $500 billion digital advertising market.
Microsoft said it will embed a newer version of ChatGPT, a tool that uses human language to process instructions, in both its Edge internet browser and Bing search engine over the coming months. Developed by OpenAI, which unveiled a multi-billion investment from Microsoft earlier this year, ChatGPT is expected to transform the group's search market share while adding billions to its top and bottom line.
The move to bring AI-powered technology into the search and ad market was echoed earlier this week by market leader Google (GOOGL), which unveiled the test launch of an AI-based tool called 'Bard'. Google parent Alphabet generated around $43 billion in search-related revenues last quarter, compared to just $3.2 billion for Microsoft.
Microsoft, however, said it expects that each point of market share gain it earns from its investment in AI and ChatGPT will translate into an extra $2 billion in revenue.
"We are basically taking the next generation of the model -- that today powers ChatGPT -- and building it in right into Bing," Microsoft CEO Satya Nadella told "CBS Mornings" co-host Tony Dokoupil.
“It's a new race in the most important software category, or the largest software category, in search. "Let's face it. Google dominates it. We are thrilled to be here launching Bing to compete. It's going to rapidly evolve. And so every day, every week, every month it's going to get better."
Microsoft shares were marked 1.33% higher in pre-market trading to indicate an opening bell price of $271.08 each, the highest since early September and a move that would lift the tech giant's cap back above the $2 trillion level.
"While Google has announced a project to add genAI to Google Search, we believe Bing’s head start could create a permanent share shift," said D.A. Davidson analyst Gil Luria, who carries a 'buy' rating on Microsoft and lifted his price target by $45, to $325 per share, following last night's media event in Redmond, Washington.
"The version of GPT integrated into new Bing and Edge products is newer than the current version of ChatGPT, which could draw increased usage for many of the queries currently pointed at ChatGPT," he added. "The combination of generative AI with online data, relevancy, and geolocation should unleash new capabilities beyond the historically-trained ChatGPT as well."
Microsoft posted better-than-expected December quarter earnings of $2.32 per share on January 25, as revenues rose 1.9% from last year to to $52.7 billion for its fiscal second quarter, but forecast current quarter sales for its intelligent cloud division of between $21.7 billion and $22 billion, a tally that missed Refinitv forecasts.
Investors had originally cheered Microsoft's December quarter gains, particularly with revenue from Azure, its flagship cloud division, rising 31% from last year and topping Street forecasts. The growth rate for that unit continues to decline, however, following a recent run of advanced in the mid to high 40-percent range as companies pull back on digital infrastructure spending.
CFO Amy Hood noted that Microsoft's customers were "exercising caution" in terms of business investment, adding that growth continued to moderate, particularly in December, and we exited the quarter with Azure constant-currency growth in the mid-30s."
