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The Opportunity for Artificial Intelligence and the Recent Underperformance of Microsoft
UBS Analyst Upgrades Microsoft Stock
In a note to clients on Thursday, UBS analyst Karl Keirstead upgraded Microsoft stock from neutral to buy and raised the price target by $55 to $400. This upgrade comes as evidence suggests that the Azure and Amazon Web Services (AWS) cloud infrastructure spend is starting to stabilize after a significant deceleration in the past year. Keirstead also highlighted near-term AI catalysts and the material underperformance of the stock since May 1st as factors that make the set up too attractive to maintain a neutral view.
Positive Outlook for Azure and Cloud Business
Previously, Keirstead had downgraded Microsoft due to declining spending trends for cloud programs like Azure and AWS. However, he now believes that Azure is no longer deteriorating and could potentially improve its revenue growth with the help of AI. Keirstead raised his estimates for the cloud business starting with the fourth fiscal quarter, which will be reported later this month.
The Impact of AI on Microsoft
Keirstead noted that AI could not only improve Azure revenue growth but also exceed company guidance. He specifically mentioned the "Copilot" feature as an example of how AI can benefit the business. He also suggested that an announcement on monetization for this feature could be on the horizon. With Microsoft's exposure to AI and the potential for higher capital expenditure intensity in 2024, Keirstead believes that the company deserves its higher valuation compared to its peers.
Majority of analysts hold buy ratings
Keirstead's upgrade brings him in line with the majority on Wall Street, as more than four out of every five analysts hold buy ratings on Microsoft stock. Despite the stock's strong rally this year, with a nearly 43% increase, Keirstead pointed out that its performance since May 1st has been in line with large-cap peers and worse than the average peer's advance. Microsoft shares rose 1.5% in Friday premarket trading.
Conclusion: The Impact of AI and Microsoft's Underperformance on New Businesses
The recent upgrade of Microsoft stock by UBS analyst Karl Keirstead, along with the positive outlook for Azure and the potential impact of AI, presents an interesting opportunity for new businesses in the AI sector. Microsoft's underperformance in the past few months, despite its strong rally earlier this year, signals that there is room for growth and improvement, especially with the integration of AI technologies.
The stabilization of spend on Azure and AWS cloud infrastructure, as well as the potential for improved revenue growth through AI, suggests that Microsoft is positioning itself to take advantage of the growing demand for AI-powered solutions. The "Copilot" feature, mentioned by Keirstead, exemplifies how AI can benefit businesses by providing innovative tools and improving efficiency. With the possibility of monetizing AI features on the horizon, companies operating in the AI space could potentially partner with Microsoft to leverage their capabilities and reach a wider customer base.
Furthermore, with the majority of analysts holding buy ratings on Microsoft stock, the market sentiment is favorable towards the company's future prospects. As Microsoft continues to invest in AI and with its exposure to this transformative technology, new businesses in the AI industry may find opportunities for strategic partnerships, collaborations, or even acquisitions to accelerate their growth.
In conclusion, the recent developments surrounding Microsoft's underperformance and the potential of AI present new business opportunities in the AI sector. By leveraging the advancements and capabilities of AI, companies can explore synergies with Microsoft and tap into a market that is set for growth and innovation.
Article First Published at: https://www.cnbc.com/2023/07/14/ubs-says-microsoft-shares-are-too-attractive-not-to-buy.html.svg)
