Jean-Luc Ichard/iStock Editorial via Getty Images
Wells Fargo maintained its Overweight rating on Microsoft (NASDAQ:MSFT) but raised the price target on the stock to $585 from $565, highlighting the company’s ‘AI Ambitions’ while noting that it is ‘still early days.’
Analysts led by Michael Turrin said their analysis for Microsoft’s AI business suggests over $100B upside case by fiscal year 2029, and they expect the company’s AI narrative increasingly shifting toward app layer/Copilot this year.
The analysts remain constructive on Microsoft’s positioning and path ahead.
Microsoft scaled its AI business to $13B annual recurring revenue, or ARR, in less than three years, its fastest product ramp ever — despite considerable capacity constraints, according to the analysts.
The analysts estimate this business nears $20B exiting fiscal year/June 2025 and scales further as constraints ease/capacity comes online. In the upside case, revenues grow to over $100B by fiscal year 2029 with net new revenue increasing more than 25% year-over-year each year. In the base case, the analysts model net new revenue growing double-digit each year, or fiscal year 2029 AI revenue of more than $80B.
Turrin and his team said that while headlines suggest Microsoft-OpenAI negotiations continue, they think the pre-existing contractual agreements in place means little changes unless it significantly improves Microsoft’s — net revenue share benefit (that is greater than 20%); duration/scope of IP access and contract (that is beyond 2030); or profit cap/terms (that is dropping AGI clause).
The analysts added that they are not expecting much else changes besides Microsoft’s January 2025 capacity exclusivity forfeiture (which benefited each company).
On Copilot, the analysts said that they see fiscal year 2026 as when Copilot begins reachingcritical mass. Over time, the analysts estimate that Microsoft could reach $12B in ARR from Copilot with just 10% penetration and modest discounting. The analysts also see enterprise stock keeping units, or SKUs, as the most likely target, which consists of about 320M of its 430M seats.
Shares of Microsoft were largely flat premarket on Wednesday.