This MSFT Stock Forecast article was written by Milana Papadopoulou – Financial Analyst at I Know First.

Highlights:

• MSFT Stock is a Buy with a target share price above $450.
• Azure has been gaining on AWS in the cloud computing segment.
• New Talent in the AI department is likely to bring prosperity.

Founded in 1975, Microsoft is the world’s largest software company, generating over $200bn in annual revenue in fiscal 2023. Operating in over 190 countries, the company is a market leader across numerous software categories, with core solutions including cloud computing infrastructure (Azure), productivity applications (Office and Office 365), operating systems (Windows), business applications (Dynamics), internet services (LinkedIn, Bing), database software (SQL Server), gaming (Xbox), devices (Surface), and other products and services addressing enterprise and consumer technology markets.

Magnificent Growth

MSFT is one of the most widely known tech stocks, with numerous investment managers choosing to hold it in their portfolio as it provides them with stable, continuous growth in value for many years. Dubbed the “Magnificent Seven” (Microsoft, Nvidia, Alphabet, Amazon, Tesla, Apple, and Meta), tech stocks remain as closely watched as ever in 2024. Due to their outsized market capitalization, driven, most recently, by the “AI hype”, these stocks hold a disproportionate influence on the market-cap weighted NASDAQ composite and S&P 500 indices. 

Although less heavy-hitting than NVDA or META in the last 12 months, Microsoft has still delivered sizeable returns to its holders and has steadily grown the distributed dividends. The most significant factors contributing to its value growth have been its partnership with OpenAI, the development of its cloud computing division, and early investments in AI technology. 

Revenue Analysis

In FY2023, the majority of revenue came from Cloud Computing Software Services (38%), Cloud Office Suite sales (23%), and Operating Systems (10%). The rest came from sales of Gaming consoles (7%), the employment search company LinkedIn (7%), and the proprietary search engine Bing (7%).

Cloud Computing Division

With the rollout of 5G and the increased adoption of optic fiber internet cables worldwide, the affordability and availability of fast internet connections have improved drastically. So much so that companies of all sizes increasingly opt for cloud computing solutions for their day-to-day operations. Firms can now swap costly server centers and IT departments for fast internet connection, where employees can interact with the cloud online to complete their tasks. Cloud computing is the on-demand delivery of computing services such as servers, storage, databases, networking, software, and analytics, and it has become a growing sector of the tech industry. 

Microsoft’s Cloud computing platform, Azure, comprises over 200 products and cloud services for businesses and government bodies. It has been core to boosting Microsoft’s profitability in recent years and earning higher valuation multiples than competitors. Although the growth slowed slightly in 2023, it is still an integral part of the management’s plan. FY2023 Q2 Revenue from Azure grew 30%, three percentage points faster than analysts’ estimates of 27%, according to the Wall Street Journal, and is expected to continue increasing. Moreover, in a mid-March investor call, Microsoft officials announced that they have made significant progress in resolving the bottlenecks they previously faced when expanding Azure architecture, efficiency, and scale. With the increasing adoption of AI, cloud services are bound to continue growing in profits. 

Cloud Computing for All

Microsoft’s dedication to market research has allowed It to offer highly customizable cloud solutions. This notion made Azure up to 5 times cheaper than rival AWS for smaller businesses with lower scale and computer intensity needs. Continuing investments in Azure training among professionals, especially in the EU, have allowed Microsoft to chip away at Amazon’s market share in 2023. In Q4 2023, Amazon Web Services had a 31% market share, according to research firm Canalys. Microsoft came in second place with 26% market share, and Google came in third with 10%. 

Another potential expansion opportunity for Microsoft in the cloud computing segment is its acquisition of Activision Blizzard. Experts believe this will pivot the company towards cloud gaming development, and this view is supported by gradual divestments from its flagship hardware gaming platform, Xbox. 

Security Issues

Despite Microsoft spending $1bn a year on cybersecurity advancements, breaches remain prevalent. According to Proofpoint, the latest large-scale one occurred in November 2023, when hackers used malicious techniques like phishing and Cloud Account Takeovers to access Microsoft 365 Applications and OfficeHome.  The attack was carried out through malicious links embedded in documents not detected by users or built-in systems. The attackers could gain access to personal and financial data; they also meddled with the multi-factor authentication system once they got access and could lock users out of their accounts. 

Security breaches are becoming far too familiar in Microsoft and many other tech companies. This is part of why the US government made it mandatory for companies to be more transparent about their security issues and disclose significant data breaches. This could be a substantial issue for Microsoft as Azure has been adopted by many organizations worldwide, with access to sensitive data like health and financial records. Additionally, the inability to tackle future security breaches promptly is likely to shatter the trust in the still-young cloud technology, which is guaranteed to stunt growth prospects. 

MSFT Stock: Alliance with OpenAI

The alliance between Microsoft and OpenAI has been dubbed “one of the most well-known but least understood partnerships.” People familiar with the matter say that Microsoft has committed up to $13bn to OpenAI, including a $10bn expansion announced in January 2024. Microsoft’s investments in the firm itself and the cloud infrastructure that ChatGPT runs on could entitle Microsoft to a 49% profit share. In addition to being an exclusive cloud provider, Microsoft’s deal granted it an exclusive license to OpenAI’s intellectual property, according to people familiar with the matter. Those IP rights could have been significant if Altman and other OpenAI employees had gone to Microsoft, as was proposed by Nadella before Altman’s reinstatement. “A lot of the relevant technology could have gone with him. Microsoft is technically a competitor but has all the IP, which puts it in a stronger position.”

ChatGPT is currently the most widely known natural language processing AI model, so early investment in it placed Microsoft far ahead of the curve. The company is presently in an exceptionally favorable position to harness the riches of wider AI adoption. However, various regulative authorities in the US, UK, and EU have questioned the partnership. This tempted Microsoft to reshape the perception of the deal: “While details of our agreement remain confidential, it is important to note that Microsoft does not own any portion of OpenAI and is simply entitled to a share of the profit distributions.” The true nature of the alliance and the exact potential material benefits remain vague to the routine investor. 

Minds behind Artificial Intelligence

Due to the newness of Artificial Intelligence and Machine Learning, companies in the tech field found themselves short of talent. Nowadays, software engineers capable of fundamentally designing generative AI models are scarce, with some earning millions of dollars. The scarcity started a war for talent between large companies and even countries. Microsoft has been relatively successful in its efforts, having been able to identify promptly and harness the bright minds in the field. Aaron Levie, chief of a cloud company, Box, stated, “Microsoft’s lead in generative AI has been driven by the Nadella identifying the right people at the right time”.

In March 2024, Microsoft announced that it had reached an agreement with the head engineers and founders of Inflection AI and that they would join the staff. Inflection has been one of the hottest startups, attracting $1.3b in investment, including a significant sum from Microsoft and Microsoft’s co-founder Bill Gates. It has also attracted several team members, leaving the startup in shambles. The co-founder of Inflection has also been named Microsoft’s new AI CEO and will head research and development efforts. Newly acquired talent will likely build a strong foundation for continuing innovation at Microsoft. 

However, the intra-country competition for talent has also been on the rise. Although the US, especially the West Coast, has become the biggest hub for all things AI and has attracted international talent, other countries are catching up. Notably, UAE, Saudi Arabia, and Taiwan were net importers of AI talent last year, and China is catching up with South Korea. This shift will increase international competition and make it even more costly for US-domiciled companies to acquire human capital. 

Microsoft 365 Copilot

Microsoft has been placing high hopes for growth in its Copilot AI assistant. The firm has been a leader in office software for businesses for many years, but with competitors circling, it hopes that adopting AI technology will help them remain in the lead. Microsoft made its Office Copilot services available to enterprise users starting November 1st. Microsoft is charging enterprise customers $30 a month for each user of Microsoft 365 Copilot. The pricing was much higher than expected, showing the company’s confidence in the product’s usefulness.

However, early reviews have been mixed, with users hesitant to adopt the new technology and doubting its practical usefulness. The CEO, however, remains firm in the view that Copilot will ramp up its adoption shortly, and the current doubts in the market are due to the technology’s newness. With broader education on the system’s practical uses, management is sure that it will revolutionize the industry. 

On January 8th, Microsoft participated in an event at CES 2024 to tout a new category of personal computers called AI PCs, with Copilot called their “marquee feature”. On March 21st, MSFT introduced the first AI PCs – two surface notebook computers powered by the latest Intel Core Ultra processors with a dedicated Copilot Button for accessing the AI assistant. MSFT stock rose 1% on the news. 

MSFT Stock: Regulatory Scrutiny

After significant scrutiny of the Activision Blizzard acquisition, MSFT stock has gradually recovered and seems straightforward. Management is, however, trying to avoid repetition and is careful in its expansion efforts. Unlike other tech companies, Microsoft has been luring top talent from startups into its staff, avoiding the ever-popular concept of acquiring. Other tech firms have followed suit, gutting numerous AI-related startups of engineers and ML specialists, leaving them with huge gaps in staff. 

 This tendency has created an interlinked web between these firms and has attracted attention from governing bodies. There are rising concerns that such a web hinders competition and gives larger and more lucrative companies a significant advantage. This skews the playing field so that the more profitable products that stick are those released by deep-pocketed firms rather than more innovative ones. 

Considering the dedication of Joe Biden’s government to acquisition scrutiny, its recent hiring of executive engineers from Inflection AI, which has been called “an acquisition without regulatory approval”, may come under scrutiny. Microsoft’s senior management, however, denies such allegations and insists that the company is dedicated to supporting innovation and believes the tech sphere to be a meritocracy. Notably, the governing bodies in the US, EU, and the UK are already in the process of reviewing Microsoft’s alliance with OpenAI. 

MSFT Stock Forecast

MSFT’s stock rally in 2023 has made it the largest company in the world by market cap [$3.13tn]. Such a high valuation assumes a P/E ratio of 38.39. Although the share price currently stands around the $420 mark, an upside is still possible. In recent public addresses, the management seemed confident they could resolve the lags in cloud computing segment expansion. Despite growth of the same magnitude as the years before being unlikely, the stock price is still likely to approach at least $450, if not $480, within the year. This is a fair projection, considering that revenues are expected to grow steadily, and margins will increase shortly. The revenue growth projection is based on analyst consensus, details from Microsoft’s reports, and previous performance. Thus, the stock is a Buy.

MSFT Stock Forecast: What are Other Analysts Saying?

• Goldman Sachs places the share price target at $450. GS’s Managing director liked, among other factors, Azure’s revenue growth and envisioned “a significant growth contribution from Generative AI”. 
• Jeffries places the target share price to be $465. In a note on January 28^th, the analysts wrote, “We expect MSFT to execute well, driven by AI tailwinds and a stabilizing macro situation.”
• Wedbush insisted on a $475 price per share. “Microsoft’s fourth-quarter earnings confirm that the firm is on a straight path toward a possible $1 trillion opportunity in artificial intelligence,” Wedbush Securities’ Dan Ives told Business Insider.
• Yahoo Finance’s analyst consensus is also bullish. The average price target is $460.92, and 80% of analysts rate the stock a Buy or Strong Buy

Conclusion

Microsoft has put itself in a position to benefit significantly from the development and broader implementation of AI and cloud technology. Like other firms in the tech sector, it is faced with uncertainty and regulatory pressure. Despite that, the continuous dedication to rapid innovation and adaptability to change will allow MSFT to come out on top. All in all, MSFT stock has significant upside potential.

It is worth paying attention that the stock-picking AI of I Know First has a high signal on the one-year market trend forecasts, supporting my position for the MSFT stock forecast. The light green for the short-term forecasts is mildly bullish, while the darker green is a strong bullish signal for the one-year forecast.

Past Success with MSFT Stock Forecast

I Know First has been bullish on the MSFT stock forecast in the past. On January 19^th, 2023 the I Know First algorithm issued a forecast for MSFT stock price and recommended MSFT as one of the best mega cap stocks to buy. The AI-driven MSFT stock prediction was successful on a 1-year time horizon resulting in more than 69.06%.

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Please note-for trading decisions use the most recent forecast.