Chatter surrounding artificial intelligence (AI) has dominated the technology sector for over a year now. Big tech is leading the charge in the AI revolution, but one company in particular could be separating from the pack.
Microsoft (MSFT -1.36%) is a major investor in OpenAI, the home of ChatGPT. The Windows developer has swiftly integrated OpenAI's features across its ecosystem, and one Wall Street analyst is sounding the alarm.
Dan Ives of Wedbush Securities recently took to X (formerly Twitter) to proclaim that Microsoft's "iPhone moment" has arrived.
Going all in on AI
Apple is one of the most recognized brands around the world. The company completely disrupted personal computing and music streaming with the introduction of the iMac and iPod.
But perhaps Apple's greatest achievement was its foray into mobile communications. The iPhone is undoubtedly one of the most successful devices ever released. While Apple was already known for its innovation, the iPhone put Apple in the driver's seat among consumer electronics businesses.
For years, Microsoft was known for its Windows operating system. Moreover, a series of acquisitions primarily under former CEO Steve Ballmer helped create the illusion that Microsoft was evolving into a more ubiquitous platform. However, investors eventually soured on this narrative -- leaving some to question where Microsoft was headed.
Ballmer's successor, Satya Nadella, has been at Microsoft's helm since 2014. Over the last decade, Nadella has transformed Microsoft into a major player in cloud computing. But with fierce competitors such as Amazon, Alphabet, and Oracle, the cloud narrative needed a new chapter.
In January 2023, Microsoft made waves after it announced a multibillion-dollar investment in OpenAI. While this may have been no more than an intriguing headline for some, Microsoft quickly made it clear that it was going all in on AI.
Image source: Getty Images.
How this strategy is going so far
One of the core new services Microsoft is marketing as part of its AI campaign is called CoPilot. While the product is fairly new, Microsoft's big bet on AI appears to be paying off in spades.
Per the company's most recent earnings call, CoPilot is seeing success in many areas across Microsoft's ecosystem. For example, the company's developer platform, GitHub, has 1.3 million CoPilot subscribers. This has led to a 40% annual increase in GitHub revenue, as of Dec. 31.
Moreover, CoPilot can integrate with apps offered by leading enterprise software platforms such as ServiceNow and Salesforce.
Microsoft's most lucrative opportunity related to AI may reside in its Azure cloud suite. Although the company's cloud platform was already performing at a respectable level, integrating ChatGPT into Azure has led to a new wave of growth. In fact, the reinvention of Azure had Nadella boasting that Microsoft has "moved from talking about AI to applying AI at scale."
Is Microsoft stock headed higher?
Ives currently has a price target of $500 for Microsoft stock, implying about 19% upside as of market close on March 29.
While this is encouraging, I am more intrigued by Nadella's statement. Both Amazon and Alphabet are also looking to leverage AI to bolster their respective cloud businesses. But Microsoft may have the edge in this regard.
It's still early days for ChatGPT and its development. And yet, in about a year's time, Microsoft has already generated impressive returns from the partnership. But at 36 times forward earnings, Microsoft stock is by no means cheap. The forward price-to-earnings (P/E) multiple of the S&P 500 is currently 20.7.
Nevertheless, I think Microsoft's premium valuation is warranted. The company is emerging as one of the leaders of the AI realm, and I agree with Ives' position that the company's "iPhone moment" is here. AI represents an important new chapter for Microsoft, and I am optimistic that the company can keep its momentum up.
