Analysts keep raising Microsoft targets as AI fuels enthusiasm
Microsoft (MSFT) is scheduled to report results of the fourth quarter of its fiscal year 2023 after the market close on Tuesday, July 25, with a conference call scheduled for 5:30 pm ET. What to watch for:
CLOUD:
In its fiscal third quarter, Microsoft reported revenue in its Intelligent Cloud segment was $22.1B and increased 16%, or 19% in constant currency terms.
“Focused execution by our sales teams and partners in this dynamic environment resulted in Microsoft Cloud revenue of $28.5 billion, up 22% – up 25% in constant currency – year-over-year,” said CFO Amy Hood at the time of the company's last report.
Meanwhile, Satya Nadella, chairman and CEO of Microsoft, offered: “The world's most advanced AI models are coming together with the world's most universal user interface – natural language – to create a new era of computing. Across the Microsoft Cloud, we are the platform of choice to help customers get the most value out of their digital spend and innovate for this next generation of AI.”
On the day after the company's last report, BMO Capital upgraded Microsoft to Outperform from Market Perform, stating that the analyst had higher conviction that Azure growth headwinds will moderate by the end of 2023 and artificial intelligence can help support Microsoft's longer-term growth. Further, the firm thinks Office growth “can remain healthy,” helped by CoPilot. While the stock is not inexpensive, the company's durable growth opportunities warrant a premium valuation, contended BMO.
Macquarie also upgraded Microsoft to Outperform from Neutral after the company reported a better than expected fiscal Q3 as Azure “fared well.” The firm saw a milder deceleration in Azure than many were expecting on macro softness, and highlighted the company's “ground-breaking” investment into OpenAI. It believes Microsoft will continue to outperform thanks to growth, earnings, new business opportunities with generative artifices intelligence, and what it viewed as a growing likelihood of the Activision Blizzard (ATVI) acquisition closing, the analyst added at that time.
More recently, UBS upgraded Microsoft to Buy from Neutral on July 14. With the “steep” Azure growth deceleration now poised to moderate, artificial intelligence catalysts ahead and the recent stock underperformance, a more positive stance on Microsoft seems warranted, the analyst told investors. The firm's latest round of checks on Azure “suggest the backdrop remains tough but is no longer deteriorating – the worst may be behind us,” the analyst added.
RISE OF AI:
In January of this year, Microsoft announced the third phase of its long-term partnership with OpenAI through a multiyear, multibillion dollar investment to accelerate AI breakthroughs.
In early February, Microsoft announced its launch of an all new, AI-powered Bing search engine and Edge browser to “deliver better search, more complete answers, a new chat experience and the ability to generate content.”
On July 18, Frank X. Shaw, Chief Communications Officer at Microsoft, stated in a blog post: “Since launching the new Bing in February, we've heard from many corporate customers who are excited to empower their organizations with powerful new AI tools but are concerned that their companies' data will not be protected. That's why today we're announcing Bing Chat Enterprise, which gives organizations AI-powered chat for work with commercial data protection. What goes in – and comes out – remains protected, giving commercial customers managed access to better answers, greater efficiency and new ways to be creative. Bing Chat Enterprise will start rolling out today in preview to organizations licensed for Microsoft 365 E5, E3, Business Premium and Business Standard at no additional cost. We will also make Bing Chat Enterprise available as a stand-alone subscription in the future for $5 per user, per month… Today, we're also pleased to announce pricing for Microsoft 365 Copilot. It will be available for $30 per user per month for Microsoft 365 E3, E5, Business Standard and Business Premium customers when generally available. While some generative AI apps focus on a single capability, like real-time transcription or copywriting, Microsoft 365 Copilot puts thousands of skills at your command.”
Subsequently, Jefferies said the Microsoft 365 Copilot pricing uplift that the company announced at Microsoft Inspire was “way ahead of previous expectations.” M365 Copilot will be available for $30 per user per month for M365 E3, E5, Business Standard and Business Premium customers when generally available, noted the analyst. Many had previously thought that M365 Copilot would be priced at a 15%-30% premium for E5 and E3 plans, but at $30 per month per user, Copilot is priced at a 53% and 83% premium for E5 and E3 customers, notes the firm, which has a Buy rating on Microsoft shares.
RISING EXPECTATIONS:
On July 19, Mizuho raised the firm's price target on Microsoft and kept a Buy rating on the shares. The big news from day one of Microsoft Inspire came in the form of a $30 per user per month add-on for Microsoft 365 Copilot, the analyst told investors. The firm estimates the cumulative incremental revenue from Microsoft 365 Copilot by the end of fiscal 2025 could exceed $9B using a 20% attach rate, and approach $19B using a 40% attach rate. It remains confident that Microsoft's growth opportunities over the medium term and beyond are “greater than many realize.”
Bernstein also noted that Microsoft announced Bing Chat Enterprise and Microsoft 365 Copilot pricing that was higher than the firm expected, at $30 per user per month for Microsoft 365 E3, E5, Business Standard, and Business Premium editions. This is a price uplift of 53% to 240%, to list price of these SKUs, depending on what Microsoft 365 edition being used. The price lift is similar to that of Microsoft GitHub Copilot. This announcement surprised the firm in many ways, says Bernstein, which has an Outperform rating on Microsoft's shares.
JPMorgan, meanwhile, raised the firm's price target on Microsoft and keeps an Overweight rating on the shares. The analyst left the company's Inspire conference “incrementally positive” on its category leadership in artificial intelligence. The announced M365 Copilot pricing of $30 per user per month is an “upside shocker” versus investor expectations closer to $10, the analyst tells investors in a research note. The price point aligns with the perspective that Copilots are far exceeding expectations in the private preview stage, says the firm.
Barclays raised the firm's price target on Microsoft and kept an Overweight rating on the shares after the company announced Microsoft 365 Copilot pricing which “suggests that the product is finally ready for prime time.” The firm sees this as a “major next step” for the company's artificial intelligence monetization. The price uplift, 53% over E5, is at the upper end of investors' expectations and should drive shares, says Barclays.
The same day, BofA raised the firm's price target on Microsoft and kept a Buy rating on the shares. BofA expects Microsoft to report “healthy 1% upside” to the firm's Q4 revenue estimate of $55.45B, based on Azure and O365 strength. The firm also expects upside to its Azure estimate of 27% year-over-year constant currency growth due to better AI/ML workloads and baseline migration strength, the analyst tells investors in an earnings preview note. BofA forecasts double digit constant currency FY24 revenue growth guidance, assuming “conservative” low 20s percentage Azure growth, low/mid teens O365 growth and Windows OEM growth of 2%.
ACTIVISION DEAL LATEST:
As previously announced, Microsoft has agreed to acquire Activision Blizzard for $95 per share in cash.
On July 18, Activision Blizzard and Microsoft entered into an agreement waiving certain rights to terminate the merger agreement if the merger has not been consummated prior to October 18, 2023. The terms of the agreement include an increase in the termination fee payable to Activision Blizzard from $3.0B to $3.5B if the transaction is terminated after August 29, 2023, and to $4.5B if the transaction is terminated after September 15, 2023. The agreement also includes amendments to Activision Blizzard's commercial Xbox arrangements with Microsoft, valued at up to $250M for each of fiscal years 2023 and 2024. The agreement further enables Activision Blizzard to declare and pay one regular cash dividend for fiscal year 2023 of up to 99c per share, prior to and not contingent on the closing of the transaction. Also on July 18, the company's board of directors declared a cash dividend of 99c per share of the company's outstanding common stock, payable on August 17 to shareholders of record at the close of business on August 2, from cash on hand.
OTHER ANTITRUST FIGHTS:
On June 29, the FTC said in a blog post that its Bureau of Competition, working closely with the Office of Technology, is focused on ensuring open and fair competition, including at key inflection points as technologies develop. Generative AI represents one of these paradigm shifts. The FTC said “Accordingly, it is especially important that firms not engage in unfair methods of competition or other antitrust violations to squash competition and undermine the potential far-reaching benefits of this transformative technology. Unfair methods of competition can distort the rate and direction of innovation. By contrast, open and competitive markets can pave the way for emerging technologies, such as generative AI, to yield their maximum potential benefit.” The agency added “Some markets for specialized chips are-or could be, without appropriate competition policies and antitrust enforcement-highly concentrated. Last year a challenge by the FTC led to Nvidia (NVDA) abandoning its proposed $40B acquisition of Arm. The FTC's complaint alleged that the merger would have stifled competition in multiple processor markets, including chips for cloud service providers. Today, increasing demand for server chips may outpace supply in some instances. There are reports, for example, that the spike in demand for server chips that can train AI has caused a shortage, prompting major cloud-server providers such as AWS (AMZN), Microsoft, Google (GOOGL), and Oracle (ORCL) to ‘limit their availability for customers.' And firms in highly concentrated markets are more prone to engage in unfair methods of competitions or other antitrust law violations.” It concluded that “As competition issues surrounding generative AI continue to develop, the Bureau of Competition, working closely with the Office of Technology, will use our full range of tools to identify and address unfair methods of competition.”
Meanwhile, Microsoft is the target of an EU antitrust complaint submitted by German competitor alfaview, the second such complaint over its bundling of video app Teams into its Office product, Reuters' Foo Yun Chee reported last week. The U.S. software and technology giant has been on the EU competition enforcer's radar since 2020, when Salesforce-owned (CRM) Slack raised concerns over the tying of Teams with Office, the author noted. Alfaview claims that bundling both products together gives teams a unique competitive advantage that is not justified by performance and which other firms can't match, the author said.
SENTIMENT:
Click here to check out recent Media Buzz Sentiment on Microsoft as measured by TipRanks.
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Originally Posted July 24, 2023 – What Wall Street is saying about Microsoft ahead of earnings
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