Analyst says Microsoft’s AI revenue opportunities are ‘very much intact’ even as company predicts ‘gradual’ monetization
Microsoft Corp. said one of the last words investors wanted to hear Tuesday in light of a big run up in its stock, but analysts seemed nonetheless undeterred.
While Microsoft Chief Financial Officer Amy Hood said that the process of making money off of AI services would be “gradual,” analysts were still confident in the potentially massive opportunity ahead of the company down the line.
Microsoft is in the midst of making various products, such as a Copilot productivity offering for the security market, available for general use, and the “potential revenue from these products could be very large,” SVB MoffettNathanson analyst Sterling Auty wrote after the company’s Tuesday afternoon earnings report.
Meanwhile, Microsoft’s management seems to be contemplating only “modest” adoption in its outlook. “That could create the potential for some large beats and raises as we move through fiscal 2024,” he wrote, while keeping his market-perform rating on the stock but boosting his target price to $355 from $306.
Though Microsoft underwhelmed a bit with its fiscal first-quarter forecast, Evercore ISI’s Kirk Materne said the company was correct to take a conservative view of AI revenue timing for the year ahead.
“We believe Microsoft did the right thing in terms of level setting expectations around near-term monetization of Copilot (i.e. it’s going to take time) though investors may have wanted more specifics on that opportunity,” he wrote.
He suggested that investors should buy the dip in Microsoft shares, off 2.1% on Wednesday.
Microsoft’s setup “remains compelling into [fiscal 2024] as Azure growth is showing signs of bottoming,” while comparisons for the More Personal Computing segment that includes Windows ” get materially easier” after the fiscal first quarter, “and the Copilot monetization opportunity will only grow over the course of the year.”
He has an outperform rating and $400 target price on Microsoft shares.
“The long term monetization opportunity around Gen AI [generative AI] is very much intact and Microsoft is uniquely positioned in the commercial market to benefit from AI adoption,” he added.
Derrick Wood of Cowen & Co. acknowledged that the “timing of growth levers” for Microsoft was one area where investors didn’t get “much clarity” in the latest report, though he also stayed bullish over the long run, maintaining an outperform rating and $390 target.
He and his team “continue to believe as the GenAI [generative AI] cycle matures, new growth levers will strengthen and we ultimately will move into a phase of beat & raise momentum,” Wood wrote.
While Microsoft expects to see capital expenditures grow sequentially in each quarter of its new fiscal year, those spending bumps could actually be an encouraging signal of the company’s belief in itself, according to Bernstein’s Mark Moerdler.
Hood “runs a tight ship,” in his view, so the outlook for sequential accelerations in capex throughout fiscal 2024 “means that management must have a line-of-sight to a significant increase in Cloud revenue,” he wrote.
Guggenheim’s John DiFucci, who rates the stock a sell, acknowledged that Microsoft is due to see AI benefits but expressed some caution.
There are “still questions, especially since the core of this technology is open source and the cost of running it remains very high, which at least partially explains the high price of Microsoft 365 Copilot ($30/month),” he wrote. “We guess we’ll just have to wait a little longer to better understand this, though the market seems to have drawn a pretty rosy conclusion already.”
DiFucci set a $232 price target on the shares.
