Microsoft's generative AI push could cause a revenue 'tidal wave' for the tech giant
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Microsoft (NASDAQ:MSFT) announced pricing for its generative artificial intelligence tool Copilot, this week at $30 per user per month, a cost that Wall Street saw as a pleasant surprise.
With other companies just starting to price their respective offerings, several on Wall Street believe that Microsoft's (MSFT) strong position in AI could result in a "tidal wave" of revenue growth for the company.
Morgan Stanley analyst Keith Weiss, who has an overweight rating on Microsoft (MSFT) and per-share price target of $415, said the tech giant is building momentum with its generative AI solutions, which should help it boost earnings growth to the high teens. 
"With our current model forecasting revenues and EPS 3% and 5% ahead of consensus in [fiscal 2024], and 10% ahead for [fiscal 2025], we see a strong potential for Microsoft to deliver the goods," Weiss wrote in an investor note. 
Microsoft's (MSFT) Azure cloud computing unit is already benefiting from generative AI, but Weiss said it should see additional benefits in the future as generative AI work - still largely done in the cloud - becomes a bigger focus for customers. 
"Bigger picture, investors are looking for signals the rate of optimization of spend is beginning to lessen as the secular catalyst of increased AI workloads and pricing uplifts loom on the other side of cyclical impacts," Weiss explained. 
(Qualcomm (QCOM) announced this week it was teaming with Meta Platforms (META) to bring large language models to smartphones and PCs.)
Jefferies analyst Brent Thill, who has a buy rating and $400 price target on Microsoft (MSFT), was even more effusive in his praise, pointing out this is just the start of Microsoft's "pole position" as the tech industry evolves over the next decade. 
Thill said if half of the roughly 115M E3 and E5 users adopt Microsoft 365 Copilot, it could generate an additional $20.6B in incremental revenue, representing roughly 53% growth from fiscal 2023 for Office 365. 
"Hence, we believe that [Microsoft 365 Copilot] could help double [Office 365 Commercial revenue] in the next 4-5 years," Thill wrote of the coming AI "tidal wave."
At its Inspire conference earlier this week, Microsoft (MSFT) said the $30 per user per month cost will be for its E3, E5, Business Standard and Business Premium customers. These customers have monthly plans that range between $12.50 and $57 per user per month.
Current E3 users pay roughly $36 per user per month for Office 365, effectively making Copilot an 83% increase for that tier of customers.
Generative AI isn't cheap to develop, host or serve - Thill actually called it "exorbitant" - leaving many investors to worry about Microsoft's (MSFT) costs for fiscal 2024. Thill sees a potential ramp up to $35B to $40B, up from $32B currently, which could be considered a negative, but Microsoft's surprisingly strong monetization and ability to scale spending should offset some worries.
Additionally, there are signs that the global economy is starting to stabilize, with Thill pointing out that there are some cases of "acceleration" in cloud consumption, which should benefit Microsoft.
Microsoft (MSFT) is set to report fourth-quarter results on July 25, with a consensus of analysts expecting the company to earn $2.55 per share on $55.48B in revenue.
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