If investors learned one thing in 2023, it's that market conditions can turn on a dime. By all accounts, 2022 was the worst year for investors in over a decade, with the major market indexes posting their worst performances since 2008. Now, just six months later, it appears the worst has passed.
Each of the major market indexes is up more than 20% from their recent respective bottoms, with some pundits calling this a new bull market. Helping drive the about-face is recent developments in the field of artificial intelligence (AI). The debut of ChatGPT helped illustrate the potentially far-reaching applications for generative AI, foreshadowing its widespread adoption.
Microsoft (MSFT 0.21%) was one of the beneficiaries of the recent AI gold rush, and its stock trades up more than 41% so far this year, more than two and a half times the gains of the S&P 500. While some investors fear the stock has come too far, too fast, Wedbush Securities analyst Dan Ives believes Microsoft stock will continue its upward trajectory and join Apple in the exclusive $3 trillion market cap club by early 2024. Here's why.
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The search is on
Microsoft is a leading provider of enterprise software and cloud computing services. As such, the company is uniquely positioned to benefit from the accelerating adoption of AI. Microsoft took a decisive step early this year when it added to its existing investment in ChatGPT creator OpenAI, bringing the total to more than $13 billion.
The company also made the strategic decision to integrate ChatGPT into its Bing search engine. Microsoft estimates that every 1% of market share gains in search will represent a $2 billion revenue opportunity.
However, it's the integration of AI into the other aspects of Microsoft's business that represents the most significant opportunity.
Its head is in the clouds
Ives said in a recent analyst note that Microsoft is leading the "AI arms race, with monetization the next step." As one of the Big Three cloud providers, Microsoft's Azure cloud provides the company with the perfect opportunity to offer AI to the masses. Ives notes this process won't "be built overnight" and Microsoft will introduce additional beta programs, as it "figures out the pricing and consumption model for enterprises." He added:
We estimate for every $100 of cloud Azure spend with Microsoft [over] the last few years, there is an incremental $35 [to] $40 of AI spend that now is on the table, which changes the game and [total addressable market].
Microsoft got the jump on the competition by quickly embracing and integrating generational AI and ChatGPT into its cloud offerings. As a result, Ives says, "The monetization opportunities around deploying AI and ChatGPT in the cloud is a transformational opportunity across the industry, with [Microsoft] in the driver's seat."
Furthermore, since Microsoft is one of the leading software providers to enterprises, the company also has the opportunity to layer AI functionality into Office 365, Dynamics, Teams, and more.
Finally, Ives cites the "jaw-dropping guidance heard around the world" from Nvidia (NVDA -1.81%) as a "direct AI barometer" for Microsoft. In late May, Nvidia provided a forecast for its fiscal 2024 second quarter (which ends July 31), guiding for revenue of roughly $11 billion, up 64% year over year and 53% sequentially.
Nvidia controls an estimated 95% of the market for the advanced processors used in machine learning (a branch of AI), according to data provided by New Market Research. This makes the company a fitting gauge for estimating the accelerating demand for AI.
So should investors consider Microsoft?
Microsoft's significant move so far this year resulted in a commensurate increase in its valuation. The stock is selling for 37 times earnings and 12 times sales, so it's no longer the screaming bargain it was earlier this year. However, if Ives is correct in his assessment -- and I firmly believe he is -- the additional revenue and profits from its AI initiatives could help Microsoft quickly grow into this valuation.
Besides, it will only take stock price gains of roughly 18% from Monday's closing price for Microsoft to surpass a market cap of $3 trillion -- so this benchmark is well within range, and it's likely only a matter of time.
