After eating up seemingly anything to do with artificial intelligence earlier this year, Wall Street has cooled its fervor, as investors have come to realize that it will take time for most companies to see material financial benefits from the technology.
Still, Microsoft’s medium- to long-term opportunity with the technology is “undeniable,” according to Loop Capital analyst Yun Kim, who initiated coverage of Microsoft shares
MSFT,
with a buy rating and $425 target price Monday.
Microsoft is “[u]niquely positioned to benefit from both ‘buy’ and ‘build’ approaches to [generative AI] adoption,” Kim wrote.
Read: Should investors ’embrace the suck’ of software stocks? Here’s what history has to say.
The company’s Azure cloud-computing business “is currently benefiting from its OpenAI Services offerings that those who are using the ‘build’ approach to GenAI technology,” he noted, adding that AI-related workloads will continue to help the Azure business.
At the same time, he’s also upbeat about next month’s expected general availability of Microsoft 365 Copilot, which he views as perhaps the industry’s largest generative AI application.
“We expect M365 Copilot adoption to be strong based on positive feedback from global system integrators (GSIs) who expect most large organizations to adopt a ‘buy’ approach to GenAI,” Kim wrote. The product can deliver a “strong incremental tailwind” to Microsoft’s Office business, but that could take some time, in his view — “much of the meaningful impact [will] likely be in FY25.”
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Kim said he sees other reasons to cheer Microsoft’s stock as well. For one, he said he sees signs that customers’ cloud “optimization” efforts are starting to wane, which could be another benefit for the Azure business.
Additionally, Kim likes Microsoft’s cybersecurity positioning. “With the Security Copilot release and its recent entry into the SSE (Security Service Edge) market, we believe MSFT now has one of the most comprehensive and strategic cybersecurity solutions in the market,” he wrote.
The company has been making heavy investments in its business, but Kim said he doesn’t see a risk to margins. “We estimate that enterprise business drives about 84% of its revenue and about 60% of its total revenue mix is recurring in nature,” he noted. “Hence, this operating framework provides the company with enough visibility into its business and provides the framework for managing its margin profile.”
