What happened
Shares of Microsoft (MSFT 1.57%) were rallying above the market today, reaching gains as high as 2.5% before reverting to a 2.2% gain as of 1:28 p.m. EST.
The software and cloud behemoth received encouraging remarks from Wedbush analyst Dan Ives today, who maintained a $290 price target on the stock, while calling a large rumored investment in AI chatbot ChatGPT a "potential game-changer." Meanwhile, a CIO survey conducted by Morgan Stanley also shed a positive light on Microsoft's competitive position with IT departments.
NASDAQ: MSFT
Key Data Points
So what
It has only been a little more than a month since OpenAI's ChatGPT chatbot was unveiled to the public. But since then, it's taken the tech world by storm. After investing $1 billion in the OpenAI back in 2019, in recent days, Microsoft has been rumored to be pursuing a much larger deal with the ChatGPT parent.
According to the rumored terms of the potential follow-on investment, Microsoft would invest another $10 billion in OpenAI at a $29 billion valuation. Microsoft would then be entitled to 75% of all profits until it recoups its $10 billion after which its investment would revert to a 49% ownership of OpenAI going forward.
Wedbush's Dan Ives thinks this would be a smart investment and potentially a "game-changer," as Microsoft could infuse its business intelligence software with OpenAI capabilities and perhaps enhance its Bing search engine to rival Alphabet's dominant Google (GOOG 0.56%) (GOOGL 0.42%) Search. Of note, Microsoft's Azure cloud platform also benefits from ChatGPT, which uses Azure as its AI processing platform. So even though Microsoft's potential $10 billion investment looks pricey, Microsoft is in a favorable position to recoup that investment not only through ChatGPT's success, but also through usage of its cloud.
Meanwhile, Ives also came out with a note yesterday saying recent channel checks into cloud-computing purchases showed a "stable" environment that was "better-than-feared." Following on Ives' channel checks, analysts at Morgan Stanley also called Microsoft "well-positioned" to gain market share in a potential IT spending downturn. In that scenario, the analysts say that as companies look to consolidate their IT vendors to simplify and trim costs, Microsoft's full stack of bundled offerings could enable it to steal market share away from competitors. Having conducted a recent survey of enterprise chief investment officers, the analysts wrote:
"Microsoft remains the leader in expected IT budget gains due to the shift to the cloud over the next three years. In fact, Microsoft expanded its lead over Amazon (AMZN 0.87%), with ~48% of the CIOs surveyed now expecting Microsoft to see the largest incremental IT budget share gains over the next three years on a net basis compared to the second placed Amazon at 15%...Microsoft continues to be well positioned within key spending priority categories such as security software, cloud computing, DW/BI/analytics, digital transformation and AI/ML."
Morgan Stanley maintains a $307 price target on the stock.
Investors have sold off cloud leaders over the past year, including Microsoft, to surprising levels, as higher interest rates and a feared slowdown in cloud-growth rates emerged last year. However, it might not be a good idea to get too bearish on the cloud giants given the long-term growth outlook for the cloud transition, which remains in its early-to-mid innings.
Now what
I wouldn't have thought a company as strong and reasonably priced as Microsoft would sell off nearly 30% over the past year, but that is what happened.
With multiple wide-moat, high-margin franchises, as well as a strong position in the growth of cloud computing, Microsoft should be a core holding in any portfolio no matter the age of the investor. Now looks as favorable a time as any to buy this core tech holding.
