There's little question that Microsoft (MSFT 0.25%) has benefited from its early focus on the shift to artificial intelligence (AI). The company was quick to adopt and integrate generative AI tools across a broad cross-section of its products and services, which has fueled a robust rally, pushing the stock up 58% over the past year.
One Wall Street investment bank believes there's more upside to come.
NASDAQ: MSFT
Key Data Points
Microsoft can fly higher from here thanks to Copilot
KeyBanc's Jackson Ader initiated coverage of Microsoft, assigning the stock an overweight (buy) rating and $490 price target. That suggests potential upside for investors of 15% given the stock's closing price of $429.37 on Mar. 21. The analyst wrote that Microsoft "sits in the catbird seat in two of the three main ways software vendors can monetize the AI wave."
Ader is, of course, referring to Microsoft's cloud infrastructure offering Azure and its growing suite of Microsoft Copilots -- digital assistants fueled by generative AI that help boost productivity.
There's evidence that suggests he is spot on. Its flagship Copilot for Microsoft 365 has been deeply integrated into the company's portfolio of Office productivity tools, but the company isn't stopping there. Microsoft quickly released an entire suite of AI-powered, job-specific Copilots for IT, sales, service, and finance, with more to come.
Furthermore, in each of the two most recent calendar quarters, Azure has grown faster than Alphabet's Google Cloud and Amazon Web Services (AWS), which suggests Azure is stealing cloud market share from its rivals. Management was quick to point out that an increasing contribution to Microsoft's cloud growth was the result of demand for AI.
Analysts' consensus estimates suggest Microsoft will grow revenue 15% in fiscal 2024 and 14% the following year. Microsoft is on track to hit that forecast with revenue up 15% through the first six months of fiscal 2024. But given the AI boost it's experiencing, revenue growth could end up coming in ahead of estimates.
The stock is currently selling for 36 times forward earnings. If its accelerating revenue growth continues, that could prove to be a bargain.
