Is Microsoft A Good AI Stock Pick? Yes, Numbers Don’t Lie
Contributor since 2012 / 10805 Followers
Summary:
- The reported $10 billion investment in OpenAI is expected to pay off handsomely for Microsoft in time to come.
- Various metrics sourced from corporate surveys, consensus estimates, and management commentary indicate that MSFT is a leader in AI with a favorable outlook.
- I leave my Buy rating for Microsoft stock unchanged, as I see MSFT as a good proxy for the AI secular growth trend.
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Elevator Pitch
My rating for Microsoft Corporation (NASDAQ:MSFT) stays as a Buy. I previously highlighted how MSFT’s financial strength puts it in a good position to leverage on future investment opportunities with my prior write-up for Microsoft published on May 5, 2023.
In this latest article, my focus is on assessing Microsoft’s appeal as an AI play. I am of the view that investing in MSFT is a good way of betting on AI’s rise based on the various quantitative metrics I sourced from company surveys, management disclosures, and sell-side forecasts. As such, I remain bullish on Microsoft with my Buy rating for the stock remaining intact.
MSFT Stock Key Metrics
There are a number of metrics which suggest that Microsoft is investing significantly in the area of AI.
MSFT is reported to have invested $10 billion in OpenAI, the developer of the AI chatbot OpenAI, in the earlier part of this year, as per Seeking Alpha News’ article. As part of this deal, Microsoft is estimated to have a 49% stake in OpenAI, and the right to get three-quarters of OpenAI’s earnings up to the point of time when MSFT achieves a full payback on its investment.
Separately, Microsoft’s capital expenditures are projected to expand by a +10% CAGR from $26.8 billion for FY 2023 (YE June 30) to $38.7 billion in FY 2027 as per S&P Capital IQ’s consensus forecasts. The sell-side analysts’ financial projections are consistent with MSFT’s comments at its Q3 FY 2023 results call that the company is “scaling our AI infrastructure to meet growing demand.”
In the next section, I evaluate whether MSFT’s substantial investments in AI have paid off.
How Does Microsoft Compare To Other AI Stocks?
JPMorgan’s (JPM) recent survey of 85 Chief Information Officers or CIOs from major enterprises indicated that Microsoft’s AI investments have delivered good results with the company being the outright leader in generative AI now.
According to a June 23, 2023 research report (not publicly available) titled “Generative AI CIO Survey: Piloting A New Glidepath For Software”, Microsoft is expected to enjoy a two-thirds share of “cloud-based Gen-Al activity/spend” for “the next three years” as per the results of the CIO survey. In contrast, JPM’s recent CIO survey highlighted that Amazon (AMZN) and Alphabet (GOOG) (GOOGL) will each have a relatively lower mid-teens percentage share of “cloud-based Gen-Al activity/spend” in the same time period.
It is clear that Microsoft has made the right decision in betting heavily on AI as mentioned in the prior section, given that MSFT is currently perceived to be the top generative AI company as evidenced by the results of JPMorgan’s survey.
How is Microsoft’s AI Industry Exposure?
Microsoft has meaningful AI industry exposure, and MSFT deserves to be seen as a key proxy for the rise of AI.
At a recent June 12, 2023 investor event hosted by the company’s CFO Amy Hood and CTO Kevin Scott, Microsoft emphasized that its “next generation AI business will be the fastest growing $10 billion business in our history.” Looking forward, sell-side analysts from Evercore see MSFT’s AI business contributing revenue of $100 million in the next four years.
The management’s comments and the Wall Street analysts’ prediction relating to the potential size of the AI growth opportunity for MSFT are realistic, taking into account the willingness of companies to spend more on AI. Referring to the JPM CIO survey highlighted in the preceding section, about 32% of CIOs surveyed by JPMorgan have the intention to “increase spending (on MSFT’s AI-related offerings) materially” in the coming three years.
As such, it is reasonable to conclude that MSFT’s AI industry exposure is significant.
What Is The Future Outlook For MSFT?
Microsoft’s growth prospects are excellent, with the company boasting a projected +18% free cash flow CAGR (source: S&P Capital IQ) for the FY 2024-2027 time period driven by AI-related opportunities.
Products and services relating to AI could potentially deliver revenue in the next few years that is equivalent to 30% of MSFT’s FY 2027 revenue, based on a comparison of Evercore’s AI revenue estimates ($100 billion) and the company’s consensus 2027 top line forecast ($328 billion). Also, I noted earlier in this article that Microsoft has an estimated two-thirds share of projected generative AI spend as per the results of the JPMorgan survey.
Investors should also pay attention to two other metrics which imply that Microsoft has a very bright future.
One key metric is that MSFT’s Azure OpenAI Service client base expanded rapidly from 2,500 as of March 31, 2023 (source: Q3 FY 2023 earnings briefing) to 4,500 in May this year. This fast pace of customer growth provides support for the bullish view on Microsoft’s AI revenue growth potential.
The other key metric is the CEO Satya Nadella’s view that “technology as a percentage of GDP will double from 5% to 10% and beyond, as technology moves from a back-office cost center to a defining feature of every product and service” in the years ahead. As indicated in the CIO survey I referred to previously, Microsoft has gained the trust of the leading companies’ CIOs based on spend allocation, which makes it well-positioned to grab a meaningful share of the expected growth in enterprises’ technology spend.
Is Microsoft An AI Stock To Buy, Sell, or Hold?
I deem Microsoft to be worthy of a Buy rating, considering that MSFT is a key play on the rise of AI. The numbers don’t lie; Microsoft is the leading player in the AI space, which means that it is a key stock pick for investors keen to gain exposure to the AI investment theme.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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