Morgan Stanley analysts, led by Keith Weiss, recently ranked Microsoft (MSFT -0.25%) as their "top pick" among large-cap software companies, citing growth prospects in generative artificial intelligence (AI) and a sensible valuation. The analyst team also raised its 12-month price target on Microsoft to $415 per share, implying a 25% upside from its current share price. That price target also implies a valuation of nearly $3.1 trillion by mid-2024 at the latest.
Here's what investors should know about this AI growth stock.
Microsoft dominates the enterprise software market
Microsoft accounted for 16.4% of software-as-a-service revenue last year, taking nearly twice as much market share as its closest competitor, and Microsoft Azure currently serves 95% of the Fortune 500 in some capacity. In short, the tech giant offers a broad range of software products and cloud services that collectively form the IT backbone for many modern businesses.
The company is best known for its Windows operating system and its office productivity suite, Microsoft 365. Windows powers more than 70% of desktop computers and data center servers, and Microsoft 365 is the most popular enterprise software product in any category. But it has also established a strong foothold in other software verticals.
Specifically, industry experts recognize Microsoft as a leader in business intelligence, unified communications, enterprise resource planning, and several subcategories of cybersecurity software. All of those markets are forecast to grow faster than 10% annually through 2030, so Microsoft should have no trouble increasing its software revenue at a double-digit pace through the end of the decade.
Microsoft is gaining market share in cloud computing
Microsoft Azure is the second-largest cloud computing business in the world behind Amazon Web Services, but the company has been gaining market share like clockwork. Azure currently accounts for 23% of cloud infrastructure and platform services (CIPS) revenue, up from 21% one year ago and 19% two years ago.
Those gains reflect strength in areas like hybrid computing and developer tools, but its arsenal of artificial intelligence solutions is particularly noteworthy. CEO Satya Nadella says Azure offers the "most powerful AI supercomputing infrastructure" on the market, and consultancy Gartner recently recognized the company as a leader in cloud AI developer services.
So what? The cloud computing market is expected to grow by 14% annually through 2030, and Microsoft is well-positioned to maintain its momentum. In other words, Azure should have no trouble matching the growth rate of the broader industry, meaning investors have another reason to expect double-digit revenue growth through the end of the decade.
AI could turbocharge Microsoft's software and cloud businesses
Microsoft has invested more than $10 billion in OpenAI as part of an agreement that could blossom into a $90 billion market opportunity by 2025, according to Morgan Stanley. Specifically, Microsoft stands to benefit from the partnership in three distinct ways.
First, Microsoft can indirectly monetize ChatGPT and any future products because it serves as the exclusive cloud provider for OpenAI. Second, it can monetize generative AI more broadly by connecting developers with OpenAI models, which can be used to build custom applications. Third, Microsoft should be able to boost its pricing power by embedding generative AI capabilities in its enterprise software. For instance, Microsoft 365 leans on generative AI to write and edit text in Word, organize and analyze data in Excel, and create and format presentations in PowerPoint.
Here's the bottom line: Microsoft's partnership with OpenAI could supercharge its enterprise software and cloud computing businesses by tapping into the growing demand for generative AI. For context, Ark Invest projects that AI software revenue will increase by 42% annually to reach $14 trillion by 2030.
Microsoft stock trades at a reasonable valuation
Microsoft has a strong presence in enterprise software and cloud computing, and its partnership with OpenAI represents a monumental opportunity. Indeed, given the growth rates discussed in the previous sections, Microsoft could realistically increase its revenue by 15% annually (give or take a few percentage points) through the end of the decade. That makes its current valuation of 11.9 times sales look quite reasonable.
So, while Microsoft's share price has already soared 39% so far this year, patient investors looking to capitalize on the AI boom should still consider buying a small position in this growth stock today.
