The level of excitement regarding the growing adoption of artificial intelligence (AI) has been palpable this year, and 2023 may well go down in history as the year AI came of age. Much of the focus early on centered on Nvidia (NVDA 0.16%), which supplies the state-of-the-art graphics cards that bring this technology to life, and the company's stellar financial results leave little room for doubt. In its fiscal 2024 second quarter (ended July 30), revenue surged 101% year over year to $13.5 billion, while diluted earnings per share (EPS) of $2.48 soared 854%.
Yet Nvidia isn't the only way to play the ongoing AI boom. As the result of a set of strategic chess moves, Microsoft (MSFT 1.34%) positioned itself to profit from this secular tailwind -- and sooner than many investors might imagine. Veteran Wedbush tech analyst Dan Ives argues that "the adoption curve is happening quicker than expected" for Microsoft and could significantly boost its fortunes in the years to come.
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Carefully orchestrated chess moves
There's little question that advances in the field of generative AI captured the world's attention. The technology, which can generate original content with a few prompts from the user, took the spotlight earlier this year. The debut of ChatGPT, the brainchild of OpenAI, captured the public imagination. Microsoft increased its already sizable investment in the start-up and quickly orchestrated a series of maneuvers, which will soon begin to pay dividends.
Microsoft quickly gave its Bing search an AI boost, providing more robust search results than were previously possible. The company also integrated generative AI tools across its suite of productivity tools, dubbing the advanced functionality Microsoft 365 Copilot, and it's hard to overstate the potential for this groundbreaking technology.
Copilot has the ability to significantly increase productivity for its users. The program can summarize and draft responses to emails, generate summaries of phone conversations, or create updates using compiled data from meetings, calendars, and chats -- and send updates to the team. Copilot can also analyze data in Excel, design presentations in PowerPoint, or help create documents in Word.
A clear uptick for Microsoft
Ives said that based on recent checks, Microsoft's monetization of AI is "happening quicker than expected." He goes on to note that "our latest Azure checks also show a clear uptick in activity sequentially (AI-driven), which gives us further confidence in Microsoft exceeding its 25% to 26% Azure growth guidance."
Microsoft recently released pricing for its AI-powered Copilot, priced at $30 per user per month (on top of existing Azure cloud pricing). Ives said he believes these tools will see significant penetration with Microsoft's sizable installed base, saying:
In a nutshell, we believe over the next three years, over 50% of its installed base will ultimately be on this AI functionality for the enterprise/commercial, which changes the game ... We estimate for every $100 of cloud Azure spend with Microsoft ... there is an incremental $35 to $40 of AI spend that now is on the table.
If Ives is even close to correct, this bodes well for Microsoft and its investors, as a quick review of the numbers shows. For fiscal 2023 (ended June 30), Microsoft generated roughly $110 billion from cloud services and Azure. This suggests that Microsoft could generate as much as an additional $35 billion to $40 billion annually over the next few years. For context, the company generated total revenue of $212 billion during its just-completed fiscal year, so this represents a significant increase.
You might be surprised to learn that Ives is much more conservative in his calculations than some of his Wall Street colleagues. Evercore ISI analyst Kirk Materne calculates that Microsoft could generate $100 billion in incremental revenue by 2027, a conclusion echoed by Beth Kindig, CEO and lead tech analyst of the I/O Fund.
The fine print
To be clear, the conclusions reached by analysts are merely estimates, and no one knows for sure how the AI revolution will play out. The value in these prognostications, however, is that directionally they show how Microsoft will benefit.
If Ives is on the money -- and I, for one, am completely on board with the long-term thesis -- Microsoft has strategically positioned itself to profit from the AI revolution. The productivity gains from generative AI could truly be a game changer, unleashing a tidal wave of additional revenue and profits.
