Since announcing its game-changing deal with ChatGPT developer OpenAI in early 2023, Microsoft (NASDAQ:MSFT) stock has surged by over 75%. Generative AI is affecting the tech giant’s fiscal performance, but it’s still early stages. Microsoft is just beginning to benefit from this groundbreaking technology.
Microsoft plans to further integrate/monetize this technology in the future. This will fuel vigorous growth. The stock’s price continues to appreciate strongly.
MSFT Stock: The AI Catalyst is Not Yet Fully Priced-In
Microsoft’s AI-powered surge in price has been because of investors factoring in future growth into its valuation. After all, while shares may be up by over 75%, it’s not as if the company’s earnings have grown to this degree over this time frame.
Even if future potential is priced-in (par for the course with any growth stock), that doesn’t mean it’s fully priced-in. There’s been a lot of talk about Microsoft’s integration of AI. The company has added AI capabilities to Azure and Office 365 platforms, as well as to its Bing search engine.
However previously, even last quarter, when the company reported very strong earnings growth (33%), this was only partly due to the AI factor.
In the quarters and years ahead, the impact of generative AI on the top and bottom line is poised to substantially increase.
Again, Microsoft is “cashing the check.” The projected resulting amounts of incremental revenue and earnings resulting from this integration/monetization effort continues to increase.
At least, according to estimates provided in a recent bullish research note on MSFT, from a Wall Street sell-side analyst.
A Path to $500 Per Share (and Beyond)
Previously, we’ve discussed how Microsoft is working to turn generative AI into new add-on products, like Copilot. Co-pilot alone has the potential to one day become a product with over $14 billion in annual sales.
That would essentially enable the company to recoup its OpenAI investment from one year’s sales of one product.
Better yet, the total amount of incremental revenue resulting from gen AI may come in well above this figure.
According to Evercore’s Kirk Materne, the total additional revenue for Microsoft’s cloud computing and software platforms could hit $54.6 billion in 2027, and $82.5 billion by 2028. That same year, incremental earnings from the AI catalyst could come in at $5.10 per share.
Not too shabby, when compared to current analyst consensus for earnings ($11.70 per share) this fiscal year (ending June 2024). Keep in mind that this potential incremental revenue and earnings growth is on top of potential non-AI growth for the company.
The launch of these products could also produce growth synergies, like increased Azure and Office 365 subscriptions. With this, it’s likely a matter of when, not if, MSFT stock hits $500 per share, or even loftier price levels.
Bottom Line on Microsoft Stock
Microsoft shares may be range-bound for long, but this may not last for too much longer. Positive takeaways from Microsoft’s upcoming “New Era of Work” event on March 21 could drive the next meaningful boost.
As the year progresses, subsequent fiscal results and updates to guidance could further convince the market that continued elevated levels of AI-powered growth, as forecast by Materne and other bullish analysts, is set to play out.
Such growth will probably enable MSFT to sustain its premium valuation (35.5 times forward earnings), and continue to rise in line with an increased bottom-line. It may take longer for shares to climb by another 75%, but not considerably longer.
Hence, as sluggish share performance belies the long-term opportunity still at hand with MSFT stock, make it a buy.
MSFT stock earns an A rating in Portfolio Grader.
On the date of publication, Louis Navellier had a long position in MSFT. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.
The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.