Microsoft shares have reached a record high, rising by 3.2% to close at $348.10, following JPMorgan Chase’s report on the software company’s growth potential in artificial intelligence (AI). This record high exceeded the previous all-time high the company reached in November 2021, the same month that Nasdaq peaked. U.S. indexes experienced a broad rally following the Federal Reserve’s announcement that it will hold interest rates.
Microsoft and AI
Artificial intelligence has been a hot topic in 2022, with Microsoft-backed OpenAI releasing the ChatGPT chatbot in November 2021. Since then, tech companies have rushed to incorporate the technology into their products, boasting about their ability to use AI to drive cost savings amid recession concerns. Microsoft is a significant beneficiary of ChatGPT’s rise and tangential products, as the company provides the underlying computing power. In addition, Microsoft has an exclusive license on OpenAI’s models, including the GPT-4 large language model that can produce natural-sounding words in response to a human’s text input.
Microsoft’s AI Business Growth
Microsoft has integrated OpenAI’s tools into its Bing search engine and the Windows operating system. After the company’s event in February to announce its Bing Chatbot, Microsoft CEO Satya Nadella stated that “it’s an exciting time in tech.” Investors are curious to see what this means for Microsoft’s revenue and earnings. In April, Microsoft finance chief Amy Hood predicted that the next-generation AI business would be the fastest-growing $10 billion business in the company’s history, with 1% of it coming from AI services.
Kevin Scott, Microsoft technology chief, provided more specifics, stating that “because it really is a very general platform, we have lots of different ways that $10 billion of ARR is going to first show up.” ARR stands for annual recurring revenue. “There is all of the people who want to come use our infrastructure, whether they’re training their own models, whether they are running an open-source model they’ve got or whether they are making API calls into one of the big frontier models that we’ve built with OpenAI,” Scott said.
JPMorgan’s Positive Report on Microsoft
Following Microsoft’s event, JPMorgan analysts raised their price target to $350 from $315 and wrote, “While MSFT continues to encounter a broad wave of cloud optimizations weighing on Azure growth, we see it planting the longer-term seeds for success across Security, Teams, Power Apps, and now the forward-looking OpenAI/ChatGPT investments.” The analysts have the equivalent of a buy rating on Microsoft’s stock.
The Future of Microsoft and AI
With Microsoft’s 46% rally this year, the company has recovered all its losses from 2022, when investors rotated out of technology in anticipation of rising interest rates and economic headwinds. The negative sentiment around cloud growth and a contracting PC market led to pessimism on Wall Street last year. However, AI’s excitement, coupled with the cost-cutting measures that tech companies implemented, has produced a renewed bullishness. The Nasdaq is up 32% this year, doubling the gains in the S&P 500. Investors are optimistic about the future of Microsoft and its potential to continue to grow through AI.
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