Microsoft Stock (NASDAQ:MSFT)
Microsoft Corporation (NASDAQ:MSFT) shares have outperformed the market thus far this year, increasing more than 15%. We can infer that the upward trend in momentum is a result of improving overall economic conditions and robust Q4 results.
The bigger news has been the interest in “ChatGPT,” which is connected to the company’s 2019 investment in the “OpenAI” research lab group. This partnership has been strengthened by the company’s new $10 billion investment, which was disclosed in January.
While chatbots and AI tools have been around for a while, what’s new right now is a form of evolution with more human-like content and more extensive real-world applications. ChatGPT pushes the boundaries of technology to new heights because it is so lifelike. CEO Satya Nadella discussed the company’s future and AI as the next “platform wave” on the most recent conference call with investors for the business.
We believe that Microsoft’s efforts to integrate AI elements into their BING search engine could reduce “Google’s” market dominance. Microsoft Office will soon include AI features, demonstrating the company’s commitment to this strategy and highlighting its enormous potential.
Because we can see both the immediate consequences and the long-term potential, we have a great deal of hope for the future.
AI-Powered BING Is an Opportunity
How quickly ChatGPT gained popularity is demonstrated by tales of how the OpenAI platform attracted 100 million users in less than two months. Data from “Google Trends” indicates that searches for ChatGPT and artificial intelligence have increased significantly over the past month, supporting the trend.
At a high level, it appears that technology will significantly disrupt a number of industries, including the conventional method of conducting an online search. The AI can provide you with an immediate response rather than a list of links, which is quicker and better at directing you to further pertinent sources. This becomes a potent advertising offer by providing a new layer of targeting toward the indicators that marketers are searching for, primarily conversions.
In addition to providing information, ChatGPT has the ability to interpret analytical concepts and provide innovative ideas. This covers everything from creating music and poetry to fixing Python code issues. We’re confident that eventually, advertisements will appear within that content.
Back in December, it was reported that Alphabet (NASDAQ:GOOGL) management had issued a “code red” to hasten the creation of its own AI tools because they were concerned about the sophisticated capabilities of AI products available on the market, such as ChatGPT. According to this metric, Microsoft’s collaboration with OpenAI was a success because it was the first to market while Google was taken by surprise.
On February 6, Google unveiled “Bard,” a chatbot that competes with ChatGPT, in a video. However, the chatbot made a number of factual errors. This event has improved Microsoft’s standing in this market.
We discussed the newest desktop programs and tools for the BING search engine. Microsoft refers to these initiatives internally as the “Prometheus model,” which the corporation considers being even more potent than ChatGPT. The actions should assist increase market share a little bit even if they are still in the early stages.
According to Statcounter, BING only accounts for 6% of all North American search traffic or 3% of the global market share for search engines. Compared to Google, whose market share has been over 90% for the past 10 years, this is significantly less. BING’s market share might be as high as 13% if just desktop searches conducted in North America are considered. We believe such figures might increase.
According to anecdotal evidence, BING’s search engine received a 10x spike in downloads when ChatGPT-like AI functions were added. In order to demonstrate that consumers are switching consistently, we might anticipate seeing at least a slight increase in the upcoming months.
Using Search Engine Marketing to Expand
Although Microsoft’s search engine has spent the last 10 years in the second tier, evidence suggests that it was improving even before ChatGPT. Microsoft’s Q2 financial report shows that revenue from search and news advertising increased by 10%, outpacing the market as a whole.
Remember that in 2022, less than 10% of the company’s total sales will come from this segment. This includes marketing on the company’s gaming websites, LinkedIn, and BING. The essential point is that the ecosystem as a whole could advance more quickly thanks to the integration of AI technologies.
We can determine how plausible this is by looking at the image where management suggests that a 1% gain in search advertising market share can result in $2 billion in sales. In addition, it has been seen that the market will expand on its own over time.
Going back to the global market share search statistics, if BING increased its share from 3% to 8% while Google decreased to 85%, it might increase its annual revenue by up to $10 billion over the following few years. Not that Microsoft will render Google obsolete, but even modest advancements can have a significant impact.
This article’s main argument is that advertising is a sector of commerce with a large profit margin. Apart from the trends in its various business sectors, such as Azure and other cloud services, Microsoft should benefit from this new growth engine in terms of earnings if it can make headway in it.
All of this implies that Microsoft’s revenues and profits will increase by a few percentage points higher over the next ten years than most people anticipate. Sales are expected to increase by 10% a year on average until 2027, according to the market. Over the forecast period, earnings power is anticipated to increase at a rate close to 12%. This is due to the fact that favorable conditions already exist. Recent measures to increase productivity, such as reducing the number of employees and firing everyone at the organization, are viewed as beneficial for increasing profits.
According to even a more cautious estimate, Microsoft’s new AI features may generate an additional $2 billion to $4 billion in advertising income annually, which would increase its earnings per share by several dollars over the following five years. As a result, the company is currently undervalued, trading at 25 times the projected the fiscal year 2024 EPS, or 29 times ahead earnings.
This is due to the average P/E multiple exceeding 32x during the previous few years. Here, it is argued that ChatGPT and new AI technologies could signal the beginning of an economic renaissance, balancing out slower trends in other sectors and persistent macro problems. The corporation appears to have a lot of room to expand and adapt over the next ten years, despite the fact that search and advertising are the easy pickings.
Calculating the Value of Microsoft Stock
Our price target for Microsoft stock for the upcoming year is $325, which is 35 times the current consensus profits per share for 2023. We believe that Microsoft stock is an excellent investment. We believe that over the coming months, evidence that the ChatGPT innovation and AI initiatives are beginning to have an impact on industry market share data for search and online advertising will significantly boost investor confidence in the company.
A tendency towards value multiple expansion can be supported when profit expectations are consistently raised and there are news reports about new products and the introduction of new AI features. Due to its size, Microsoft is in a strong position to capitalize on recent attention and identify methods to improve the interoperability of its services.
Although we are risk-averse, we are aware that Microsoft stock is not immune to the consequences of a choppy stock market or a deteriorating economic climate. If quarterly results aren’t as strong as anticipated or if there are indications that AI programs aren’t working, shares may decline. A critical area of technical support in the near future, in our opinion, is the share price of $250.
Featured Image: Pexels @ Salvatore De Lellis
