Analysts Bullish on Microsoft's AI Monetization Plans, Predicting $40B to $90B Incremental Contribution in FY25

Analysts Notebook wrote a column · Jul 19, 2023 18:33

$Microsoft (MSFT.US)$'s shares surged by 4% to a record high of $359.49 after it announced the pricing of its new Microsoft 365 artificial intelligence subscription service named Copilot, which will add AI to popular Office products such as Word, Excel, and Teams.

The service will cost an extra $30 per month and could increase monthly prices for enterprise customers by up to 83%, bringing in additional revenue through recurring subscriptions. Access to Microsoft 365 Copilot requires a $30 premium, nearly doubling the cost of E3 subscriptions for businesses seeking AI-powered features. For Microsoft 365 Business Standard, this is nearly three times the cost, as it costs $12.50 per user, per month.

Microsoft's AI ambitions were supercharged earlier this year when the company purchased a 49% stake in OpenAI for $10 billion. And the pricing announcement highlights how Microsoft is expanding its suite of Office software, making it more appealing to businesses seeking to integrate AI into their workflows.

Keith Weiss, a $Morgan Stanley (MS.US)$ analyst, raised his price target on Microsoft and named it a top pick in large-cap software. Keith Weiss raised his 12-month price target on Microsoft to $415 from $335 and maintained his Overweight rating on the stock.

Generative AI looks to significantly expand the scope of business processes able to be automated by software, and Microsoft stands best positioned in software to monetize that expansion," Weiss said. He added that Microsoft should be the one of the first beneficiaries of monetizing AI.

Keith Weiss outlined a framework for Generative AI monetization across Azure, Office 365, Bing & Security. He models about $40B incremental contribution to FY25 revenue - that's 20% above consensus 'before' the bullish pricing just announced, and he discussed a credible Bull Case contribution of about $90B.

Estimation before the pricing announced

Other analysts are also very bullish on the future of Microsoft, basing their optimism on the company's exposure to AI. Of the 51 analysts surveyed by FactSet, 43 say the stock is a Buy, seven say it's a Hold, and one has a Sell rating.

Wedbush analyst Dan Ives sees a blue ocean opportunity for Microsoft to monetize its AI offerings, as it has a headstart relative to other companies and a massive installed base to tap into.

We believe over the next three years over 50% of its Microsoft installed base will ultimately be on this AI functionality for the enterprise/commercial which changes the game for Nadella and company," Ives said in a Tuesday note.

Dan Ives rates the stock at Outperform with a $375 price target. He wrote in a research note earlier this week that he believes Microsoft should join Apple in the $3 trillion market-cap club by early 2024, with the monetization of AI coming sooner than Wall Street anticipates, and ChatGPT becoming the "next leg of growth" for the stock.

Source: CNBC. Microsoft, Markets Insider, Barron's, Morgan Stanley

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