Microsoft shares are up 55.6% YTD versus a gain of 43.3% for the Nasdaq Composite. (Photo by David … [+]
Microsoft (MSFT) in 2024 will begin to reap the benefits of the recent launch of its generative AI-powered 365 Copilot for enterprise customers. Priced at $30 a month per user, the new AI assistant is set to provide incremental revenue growth.
Fueled by AI enthusiasm, Microsoft shares, recently trading at $373.25, are up 55.6% YTD versus a gain of 43.3% for the Nasdaq Composite. In late November, the stock hit a new record high of $384.30.
Morgan Stanley’s recent CIO survey was upbeat about Microsoft’s exposure to key secular AI themes. It’s clear the company has a broad scope to monetize generative AI across its vast product portfolio. HSBC sees generative AI as a demand catalyst for a number of Microsoft products.
A survey of reseller partners conducted by JP Morgan revealed plenty of optimism about 365 Copilot, with hefty adoption expected across the customer base within the next 30 months. About 40% of the Fortune 100 took part in the initial preview of the product.
Macquarie forecasts that Microsoft by the end of FY’25 (June) could generate approximately $7.3 billion of incremental annual recurring revenue (ARR) from 365 Copilot based on estimated initial uptake of 5% (about 20 million users). By FY’26, the Copilot portfolio of products can generate $9.1 billion in revenue and 49 cents in per-share earnings, according to the firm. Macquarie thinks Microsoft shares are undervalued based on the Copilot profit potential. The firm recently lifted its Microsoft price target to $430 from $405.
A main goal for 365 Copilot is to make employees more productive in the workplace. Working alongside users, the tool is able to write reports, compose emails, generate meeting summaries, recommend follow-up actions and quickly transform written content into a visual presentation with just one click. It’s estimated that users can save about 15 to 30 minutes a day with 365 Copilot, freeing up five to 10 hours a month to accomplish other tasks.
Large language models (LLMs) hosted in Microsoft Cloud via the Azure OpenAI Service form the core of 365 Copilot. These LLMs are trained on massive amounts of organizational data. They generate responses to user prompts (statements or questions using natural language as part of a chat session) based on their training and understanding of context. The LLMs get more context as users interact with prompts. They refer back to their knowledge base just like humans.
The orchestration layer of 365 Copilot is a significant part of the overall process. The tool works directly with various Microsoft applications, using the search functionality for information retrieval to feed the user prompts. The Microsoft Graph adds additional information about the relationships and activities centered around an organization’s data. For example, 365 Copilot can easily find information on a particular contract by going back into old emails, notes and files.
Piper Sandler called the release of 365 Copilot an “iPhone moment” for Microsoft, saying the tool demonstrates the company’s first-mover advantage in generative AI. The firm notes the similarity to the Microsoft Cloud opportunity that started in 2008 and has grown into a revenue franchise of $125 billion+. Piper thinks Microsoft’s AI push can eventually lead to a long-term opportunity totaling more than $100 billion. It sees $10 billion+ in revenue within three years.
Ahead of the release of 365 Copilot, Microsoft in October reported strong fiscal Q1 (Sept.) results, with total revenue rising 13% to $56.52 billion, above the consensus of $54.55 billion. Microsoft Cloud revenue of $31.8 billion gained 24%, accelerating from FQ4 growth of 21%. Azure revenue rose 28% in constant currency, accelerating 100 basis points sequentially and surpassing the guide of +25% to +26%.
The market applauded the FQ1 outperformance from Azure. Goldman Sachs pointed out that the Azure growth acceleration from the June quarter was the first positive sequential change for this business since FQ3 (March) of FY’22. Goldman hiked its Microsoft price target to $450 from $400, saying its thesis of Azure growth re-acceleration is playing out, driven by ramping generative AI workloads along with a more subdued impact from cloud cost optimizations.
More than 18,000 organizations now use the Azure OpenAI Service, up from 11,000+ in the previous quarter. In FQ1, AI-based services added 300 basis points of growth to Azure, up from a 100 basis point boost in the previous quarter. Bernstein upped its Microsoft target to $406 from $400, noting the healthy Azure performance and bullish prospects for 365 Copilot.
In October, Loop Capital initiated Microsoft at ‘Buy’ with a price target of $425. The firm says Microsoft’s growth is set to accelerate thanks to its two most strategic businesses: Azure and generative AI products. Microsoft has positioned itself to benefit from both large enterprises that prefer to buy pre-packaged generative AI solutions and independent software vendors that are building out generative AI packaged solutions using Azure OpenAI, Loop said.
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