Has Microsoft (MSFT) already been crowned the winner in the artificial intelligence race? With the company’s "multi-year, multi-billion dollar" investment in ChatGPT developer OpenAI, Microsoft has made no secret that AI will be a key source of its future growth.
The enterprise software and cloud giant is scheduled to report third quarter fiscal 2023 earnings results after the closing bell Tuesday. The market is seemingly on board with Microsoft’s early leadership position. With a gain of 21% over the past six months, while climbing 20% year to date, Microsoft’s AI investments is being rewarded. And there are more gains ahead, according to Morgan Stanley analyst Keith Weiss.
When discussing the leading software companies that are pushing into the cloud and AI markets, Weiss said, “Microsoft is best positioned to gain market share.” Weiss, who has an Overweight rating on the stock with $307 price target. The analyst recently cited results from a Morgan Stanley survey showing that Microsoft has a "higher degree of cloud adoption" among enterprise customers. Adding that AI is expected to grow to 9% of current IT spending in three years, up from 3% growth this year.
Weiss said Microsoft was cited consistently as "the largest share gainer" of AI and machine learning spending during the next few years. The company's push into artificial intelligence and renewed confidence in its Bing search engine, coupled with its fast-growing Azure cloud platform, makes Microsoft a stock to own in 2023 and beyond. Elsewhere, the company’s recent layoff announcement is the latest acknowledgment by management that its earnings are slowing compared with the peak, and also, more broadly, that a recession may be imminent.
While the market remains broadly positive on Microsoft’s long-term outlook, concerns about rising inflation, rising interest rates and slower tech spending has forced the company to trim it global headcount, while shifting its resources away from non-strategic areas. On Tuesday, the company’s guidance will gauge how confident the management feels about its growth potential and the company’s ability to navigate through margin headwinds.
For the quarter that ended March, the Redmond, Wash.-based tech giant is expected to earn $2.23 per share on revenue of $51.02 billion. This compares to the year-ago quarter when earnings were $2.22 per share on $49.36 billion in revenue. For the full year, ending June, earnings are projected to rise 1.5% year over year to $9.35 per share, while full-year revenue of $208.81 billion would mark a year-over-year increase of 5.3%.
The company’s push into artificial intelligence by way of its $10 billion investment in Open AI is the “x-factor” in the market’s renewed optimism. Terms of the deal suggests Microsoft will get a 75% share of OpenAI’s profits. Microsoft’s AI advances can boost its efforts in web search, allowing it to better compete with Alphabet (GOOG , GOOGL). Meanwhile, in the second quarter, the company earned $2.32 per share, topping Wall Street estimates by a penny, while revenue of $52.7 billion rose 2% year over year, slightly missing the $53.2 billion estimate.
Revenue was driven by 18% rise in Intelligent Cloud revenue to $21.5 billion, while revenue from Productivity and Business Processes, which includes Office commercial and consumer products and cloud services, rose 7% year over year to $17 billion. During the quarter, the company laid out new philosophy for its push into artificial intelligence technology, with CEO Satya Nadella saying, "Maximum value gets created during shifts in the market." Adding, ”We are well positioned to capture the opportunities in AI used by customers like OpenAI.”
As such, until there is a noticeable decline in performance and execution, Microsoft remains a stock to own for the next 12 to 18 months.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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