ChatGPT: Microsoft's Secret Weapon for a $315 Share Price!

ChatGPT: Microsoft's Secret Weapon for a $315 Share Price!

During the last two weeks one of the largest companies in the world transformed into a nimble start-up, and investors rewarded the business with billions in shareholder value.

Executives at Microsoft (MSFT) announced Tuesday that the Redmond, Wash.-based company will formally incorporate artificial intelligence into its internet search business. Shares jumped 4.2%.

Investors should take another look at Microsoft.

The gains on Tuesday are only the latest surge in what has become a terrific two weeks for shareholders. Microsoft stock is up 10.3% since the company announced on January 23 that its partnership with OpenAI was being extended. The $10 billion agreement will bring OpenAI artificial intelligence tools to Microsoft software products, including Bing, its internet search engine. Shareholders have earned a cool $186 billion since the formal announcement.

Objectively, the math does not add up. 

AI is not new, OpenAI is not best-in-class technology, and Microsoft's Bing isn't in the same galaxy as Google Search, the category leader with 92% market share, according to a report at StatCounter. Bing commands only 3% share.

The force multiplier is Microsoft, with its deep pockets, and considerable scale.

Investors have suspended disbelief.

None of this is an accident. It is all masterful sleight of hand to distract attention away from weakness in enterprise spending, the genesis of Microsoft's core business.

Satya Nadella, chief executive officer said in January that enterprises are refocusing their workloads in an effort to cut spending. This process is expected to last at least two more quarters and should keep revenues during the third quarter in the range of $50.5 billion - $51.5 billion, implying growth of only 3%, far below earlier forecasts.

By contrast, ChatGPT, the OpenAI chatbot that is coming to Bing, is full of promise. The technology has been endlessly hyped by the media as the next great breakthrough. Analysts at UBS said last week that ChatGPT is on track to reach 100 million monthly active users in only two months. This is a faster trip to that milestone than TikTok, the short video, social media sensation. 

The appeal of ChatGPT, or chat generative pre-trained transformer, is conversation. The software uses AI to train extremely large language models culled from the internet. That data is then manipulated into human-like conversations, with surprisingly complex answers. ChatGPT feels like the future on information gathering. 

Nadella claims that all computer interaction in the future is going to be mediated with these helping agents. He calls chatbots co-pilots. However, investors see a big earnings driver. 

Chatbots and AI systems in general use a lot of computing power. Thankfully, Microsoft has a solution. Its Azure cloud computing business is the fastest-growing large cloud operator in the world. Its partnership with OpenAI ensures that all of those chat queries will happen inside Microsoft cloud data centers, and mostly alongside Microsoft digital ads. It’s the calculus that is driving the share price higher.

Some of this is hype.

Many new technologies have come and gone since the pandemic. From leisure space travel to decentralized finance, the ideas have been big, yet too far off in the future to make economic sense. AI is different. It is not new, and no longer radical. The time for AI has come.

This is mostly due to the massive investment in infrastructure by firms like Amazon.com (AMZN), Alphabet (GOOGL), and Microsoft. They are spending billions every year to build supercomputers and storage facilities in the cloud. These facilities are the brain behind AI, and they are lucrative businesses.

Microsoft cloud revenue is on a $110 billion annual run rate. And Azure, a key component, is growing at 31%, year-over-year.

At $267.56, shares trade at 25x forward earnings, and 9.9x sales. While these are lofty ratios, they are reasonable given the near term hype over AI.

Microsoft shares could easily trade to $285 in the near term, and $315 by the end of the year. The giant software business is behaving like a start-up. Higher prices will follow.

 Are you ready to take control of your financial future? Our Strategic Advantage newsletter provides the insights and guidance you need to succeed. Try it now for just $1!