Microsoft stock hits record as executives see $10 billion in AI revenue

Microsoft shares climbed to a record Thursday after analysts at JPMorgan Chase designated software maker̵[ads1]7;s growth prospects in artificial intelligence.

The stock rose 3.2% to close at $348.10, topping its previous record high set in November 2021, the same month the Nasdaq peaked. US indices had a broad rally, following the Federal Reserve’s announcement on Wednesday that it would hold off on raising interest rates.

AI has been a hot topic all year, after Microsoft-backed OpenAI released the ChatGPT chatbot in November, which quickly went viral. Tech companies have rushed to embed the technology into products and features and have touted their ability to use AI to achieve cost savings as recession worries persist.

Microsoft is a big beneficiary of the rise of ChatGPT and tangential products. On top of its large investment in OpenAI, the company provides the underlying computing power. Microsoft also has an exclusive license to OpenAI’s models, including the large language model GPT-4 that can spit out natural-sounding words in response to a human’s text input.

Microsoft has integrated OpenAI tools into its Bing search engine and even its Windows operating system. At the company’s event in February to announce its Bing Chatbot, Microsoft CEO Satya Nadella said that “it’s an exciting time in technology.”

Investors want to see what that means for Microsoft’s earnings and revenue.

In April, Microsoft CFO Amy Hood said she expects fourth-quarter financial growth for the Azure cloud of 26% to 27% year-over-year in constant currency, with 1 percentage point coming from AI services. On Monday, in a public discussion with Microsoft chief technology officer Kevin Scott, Hood provided more details, saying that “the next generation AI business will be the fastest growing $10 billion business in our history.”

In the past four quarters, Microsoft has generated nearly $208 billion in total revenue.

Scott elaborated on Hood’s prediction.

“Because it’s really a very general platform, we have a lot of different ways that the $10 billion ARR is going to first emerge,” he said. ARR stands for annual recurring income.

“It’s all the people who want to come and use our infrastructure, whether they’re training their own models, whether they’re running an open source model that they have, or whether they’re making API calls to one of the large boundary models that we’ve built with OpenAI,” Scott said.

After the event, JPMorgan analysts raised their price target to $350 from $315.

“As MSFT continues to face a broad wave of cloud optimizations weighing on Azure growth, we see it planting the long-term seeds for success across security, teams, Power Apps and now the forward-looking OpenAI/ChatGPT investments,” the analysts wrote. , which has a corresponding buy rating on Microsoft shares.

With Microsoft rallying 46% this year, the stock has recouped all of its losses from 2022 as investors rotated out of tech in anticipation of rising interest rates and economic headwinds.

Negative sentiment around cloud growth and a shrinking PC market led to pessimism on Wall Street last year. But the excitement around AI in addition to cost-cutting measures that technology companies implemented provided a renewed bullishness. The Nasdaq is up 32% this year, doubling the rise in the S&P 500.

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