Microsoft (NASDAQ:MSFT) has experienced impressive growth this year, with shares up by 33% year-to-date, largely fueled by the surge in artificial intelligence (AI) investments. While Microsoft’s partnership with ChatGPT parent company OpenAI is well-known, the company has quietly integrated generative AI technology into its various offerings, extending from its search engine Bing to its Office suite, flagship Windows operating system, and Azure.
The potential for further monetization of Microsoft’s products through generative AI is substantial, despite the looming threat of antitrust regulation. Microsoft is determined to maintain its first-mover advantage in the rapidly evolving field of generative AI.
Microsoft Leads the AI Race, but Alphabet Is a Close Competitor
Microsoft is not the sole player in the race to leverage AI advancements. Alphabet, the parent company of Google, is also aggressively incorporating AI innovations into its everyday productivity tools, akin to Microsoft’s approach.
When thinking about Google today, AI is likely the second concept that comes to mind, following its core search function. While allowing Microsoft to take the lead in AI has both advantages and disadvantages, it is evident that even advanced large language models like ChatGPT-4 have room for improvement in terms of response accuracy. Integrating additional data sources into Bing AI appears to be a prudent step, but it may not entirely eliminate “hallucinations.”
Microsoft faces competition from rivals eager to replicate its impressive AI strategy, but surpassing Microsoft in this field is a formidable challenge. Consequently, Microsoft’s stock remains a top choice for AI investors, at least from our perspective.
Microsoft’s CEO, Satya Nadella, recently testified before the U.S. Department of Justice in the context of the antitrust case against Google. Despite the improvements brought by ChatGPT, Nadella acknowledged that Bing still struggles to compete with Google Search. Google’s dominant position and its robust ecosystem of productivity tools pose significant barriers.
Google’s ecosystem, while not as closed as Apple’s, makes it convenient for users to stick with Google Search, especially if they are accustomed to using Gmail, Sheets, Docs, and other tools. Moreover, decades of using Google as a search engine have become ingrained in users’ habits. Additionally, concerns about large language models “hallucinating” during searches may discourage users from switching to Bing, even with ChatGPT-4.
Nadella emphasized that altering consumer behavior requires more than AI innovation and would likely necessitate a company like Apple to bring about real change in the search space. Microsoft had reportedly pitched Bing to Apple as a replacement for its default search option in 2020, but the deal did not materialize.
Currently, Microsoft’s Bing, even with ChatGPT’s capabilities, does not pose a significant threat to Google’s dominance in the search engine market.
Conclusion
Microsoft’s stock appears to be a compelling investment opportunity, particularly in the realm of AI. The same holds true for Alphabet. Despite their visibility, the market might still underestimate their potential, especially following a recent 12% pullback in MSFT.
Wells Fargo’s Michael Turrin is bullish on Microsoft’s stock, adding it to his firm’s Tactical Ideas List. He foresees a “favorable path” forward for Microsoft, with the potential for more than a 25% increase from its current price, setting a $400 price target.
Turrin’s optimism about Microsoft is not unwarranted. Microsoft represents a promising AI investment that may be hiding in plain sight.
Featured Image: Pixabay
Author Faith Yakubu