Microsoft's AI Revenue Expected to Exceed $10 Billion

Microsoft Corp. is making waves in the cloud computing space with its Azure platform, which is poised to significantly boost the company's artificial intelligence (AI) revenue projections to over $10 billion. This optimistic outlook comes from Piper Sandler, a reputable financial services firm, in a report dated January 28.

Key Insights: According to Brent Bracelin, a senior analyst at Piper Sandler, the AI growth is primarily fueled by Azure's extensive workloads. The firm maintains an ‘overweight’ rating on Microsoft stock, setting a price target of $520 per share, indicating a potential upside of nearly 20% from its trading price of approximately $434.57 at the market's close on that day.

A significant part of Microsoft's success in recent years can be attributed to Azure, which has consistently showcased double-digit revenue growth in constant currency for the last seven years. In fiscal year 2020, Azure recorded revenues of $12.6 billion and surpassed a $50 billion annual revenue run rate by September 2023. The projection suggests it could exceed $100 billion by March 2026.

This bullish outlook, however, does come with some caution. Bracelin warns that short-term obstacles like currency fluctuations, potential losses from investments in OpenAI, and substantial capital expenditures on AI infrastructure could momentarily affect Microsoft’s earnings per share (EPS) and free cash flow growth.

Piper Sandler encourages investors, especially those focusing on large-cap growth, to maintain a long-term perspective. The current elevated capital investments are essential for establishing a solid foundation for future growth. The fast emergence of Microsoft's AI sector, projected to generate notable revenues and exhibit triple-digit growth, highlights the company’s considerable long-term earning potential.

Investment Considerations

Piper Sandler outlined several critical points for investors to take note of:

• Capital Expenditures: The race for AI infrastructure advancements might push capital expenses, including leases, to over $80 billion in fiscal year 2025.

• Currency Impacts: Fluctuations in currency could reduce revenue by around 200 basis points.

• OpenAI Financials: Analysts expect a potential EPS reduction in the range of $0.16 to $0.25 per quarter due to losses incurred from OpenAI investments.

• Project Stargate: An initiative focused on improving AI training efficiency, with Microsoft retaining intellectual property rights expected to last until 2030.

Why This Matters: Azure operates as Microsoft’s cloud computing platform, while OpenAI stands as a research laboratory dedicated to developing AI technology. The partnership between Microsoft and OpenAI, known as Azure OpenAI, allows users to utilize OpenAI’s models through the Azure platform.

Recently, a Chinese AI competitor named DeepSeek has gained attention with its R1 model, which is being touted as a formidable alternative to OpenAI’s offerings, potentially at lower costs. The full effects of DeepSeek’s advancements on the market remain to be evaluated.

Microsoft is set to reveal its second-quarter financial results on January 29, which could provide further insights into its ongoing performance and future prospects.

Market Activity

In premarket trading, Microsoft shares experienced a slight rise of 0.51%, while the Invesco QQQ Trust, Series 1 (QQQ), which tracks the Nasdaq 100, saw an increase of 0.54%. Currently, Microsoft holds a consensus ‘buy’ rating with an average price target of $510.74, based on 32 analysts’ evaluations. The price targets range widely, from a low of $465 to a high of $600. Recent analyses from Piper Sandler and other major investment firms suggest a bullish average target of $523, translating to a potential upside of 20.35%.Microsoft, AI, Revenue