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Microsoft Corporation‘s (NASDAQ:MSFT) partnership with generative artificial intelligence (GenAI) developer OpenAI has become the star celebrity marriage of the technology industry.
It is a union that will allow the company to “further distance itself from the competition” and sustain double-digit revenue and profitability growth for years to come, according to Stifel analyst Brad Reback.
“This is the first time in over two decades Microsoft is not playing from behind in an emerging tech trend,” said Reback.
He added: “We believe its increasing GenAI scale will become a meaningful competitive advantage as the company is able to leverage the virtuous circle generated by its unique Infrastructure & Application usage-based insights to inform its future investment and monetization strategies.”
Indeed, although GenAI development is setting a blistering pace, few companies have been able to leverage it at a scale where it can add significantly to profits. Stifel believes Microsoft has the lead in the industry that change this.
Reback points to Microsoft’s Azure platform which is gaining “mind share” with at least a third of the 53,000 organizations that use AI services within Azure, are new to the platform.
Furthermore, it can use data on AI usage by its customers within Azure to help inform it on future investment and monetization decisions.
“Overall, we believe Microsoft’s AI infrastructure as a service (IaaS) and platform as a service (PaaS) opportunity could very well potentially double Azure’s total addressable market,” Reback said.
But what does this mean for future revenues and profits at Microsoft? Reback noted that it took Azure around three years to reach $1.9 billion of annual revenue, but AI IaaS/PaaS workloads should be approaching a $7 billion run-rate by the end of this year.
Stifel kept its Buy rating on Microsoft and left its $455 target price unchanged. Shortly after the market open on Friday, Microsoft shares were trading 0.2% lower at $412.49.
The iShares U.S. Technology ETF (NYSE:IYW), an exchange-traded fund with tracks the top tech stocks, with a 17% weighting for Microsoft, 15% for Apple Inc. (NASDAQ:AAPL) and a 7% holding in Nvidia Corporation (NASDAQ:NVDA) was up 0.7% at $143.24.
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