Microsoft's Accelerated AI Adoption Could Drive Strong Growth, Analyst Says

Wedbush analyst Daniel Ives reiterated an Outperform rating on Microsoft Corp MSFT and a $400 price target. 

Ives considers that while management has talked about a "gradual ramp" for AI monetization in FY24, the adoption curve is happening quicker than expected based on recent checks. 

The analyst's latest Azure checks show an apparent uptick in AI-driven activity sequentially, which gives further confidence in Microsoft exceeding its 25%-26% Azure growth guidance in FY1Q. 

In July, Nadella & Co. announced AI pricing. So far, the feedback from customers/partners has been received well, with many enterprises planning/ budgeting broader AI projects over the next 6-9 months. 

The pricing will increase list prices for MSFT on the commercial front, and he believes penetration is on pace to be significant over the coming years around AI within its installed base. 

Over the next three years, over 50% of its MSFT installed base will ultimately be on this AI functionality for the enterprise/ commercial, which changes the game for Nadella & Co. 

While AI use cases will build markedly in FY24, it is clear that FY25 for Microsoft remains the valid inflection year of AI growth. 

The analyst estimates that for every $100 of cloud Azure spent with MSFT in the last few years, there is an incremental $35-$40 of AI spent now on the table. ChatGPT will be the next leg of the growth stool for MSFT. 

Ives' thesis remains that the cloud and underlying Office 365/Windows ecosystem will comprise a bigger and bigger piece of Microsoft and will ultimately spur growth and margins into FY24. 

Microsoft is just starting to hit its next growth gear with ChatGPT and AI, adding a new layer of development to the MSFT story over the coming years. 

Other beneficiaries include Google, Amazon, Oracle, IBM, Salesforce, Palantir, and many others.

Ives projects Q1 revenue of $54.48 billion vs. consensus $54.49 billion and EPS of $2.63 vs. consensus $2.65. He estimates FY24 revenue of $236.25 billion vs. consensus $235.35 billion and EPS of $10.81 vs. consensus $10.97.

Price Actions: MSFT shares traded lower by 0.02% at $320.71 on the last check Thursday.