Microsoft Corp.'s (NASDAQ:MSFT) OpenAI partnership has propelled the software giant to the forefront of the artificial intelligence revolution that is getting entrenched. After solid gains in 2023, the stock could be in for incremental upside in the new year, according to a bullish analyst.

Microsoft Analyst: Wedbush's Daniel Ives maintained an Overweight rating on Microsoft shares and upped the price target from $425 to $450, suggesting roughly 20% upside potential. The analyst also said Microsoft was in Wedbush's "Best Ideas List" into 2024.

Microsoft Thesis: The upward price target adjustment followed "incrementally bullish" AI customer checks regarding "game-changing" Co-Pilot monetization potential into 2024, Ives said in a note. Co-Pilot is the chatbot that the company unveiled this year.

"We view this as Microsoft's 'iPhone Moment' with AI set to change the cloud growth trajectory in Redmond the next few years," the analyst said. Over the next three years, over 60% of Microsoft's installed base of enterprise/commercial customers will likely be on the Co-Pilot AI functionality, he said, adding that it could augment the company's revenue by about $25 billion in fiscal 2025.

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Microsoft's fiscal year 2025 which begins in July 2024 will be the true inflection year of AI growth, with pricing, beta customers, and use cases all being rolled out over the next 3-6 months, Ives said.

The stock is yet to price in the next wave of Cloud and AI growth in fiscal year 2024, given strong competitive positioning versus rival Cloud companies such as Amazon, Inc. (NASDAQ:AMZN) and Alphabet, Inc. (NASDAQ:GOOGL) (NASDAQ:GOOG), he said.

"Monetization opportunities around deploying AI and ChatGPT in the cloud is a transformational opportunity across the industry with Redmond in the driver's seat," the analyst said. "We estimate for every $100 of cloud Azure spent with MSFT the last few years there is an incremental $35-$40 of AI spend."

The Cloud and underlying Office 365/Windows ecosystem is going to comprise a bigger and bigger piece of Redmond going forward and will ultimately spur growth and margins into the rest of the fiscal year 2024 and the fiscal year 2025, the analyst said.

Microsoft Stock: On Wednesday, the stock fell 0.16% to $374.07, according to Benzinga Pro data. For the year, the stock has gained about 58%.

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