Microsoft set to become next $3 trillion tech giant, backed by AI dominance

Microsoft is predicted to become the next mega-cap tech company to achieve a valuation of $3 trillion, following in the footsteps of Apple, which recently reached this milestone. his is according to a study by American investment bank, Morgan Stanley, The investment bank has labeled Microsoft stock as a “Top Pick,” projecting a potential upside of 22% from its current levels.

The main driving force behind this positive outlook is the tech giant’s dominant position in the generative AI race, which positions the company to capitalize on the expanding trend and quickly monetize it.

Morgan Stanley analyst, Keith Weiss highlighted the significant potential of generative AI, a technology that aims to automate a wide range of business processes through software. Microsoft is deemed the best-placed company in the software sector to monetize this expansion due to its extensive portfolio and integration capabilities. Weiss also emphasized that the company’s valuation remains reasonable, despite its already strong positioning in the field of generative AI.

“Generative AI looks to significantly expand the scope of business processes able to be automated by software, and Microsoft stands best positioned in software to monetize that expansion, which accompanied with a still reasonable valuation makes Microsoft our Top Pick in large cap software.”

Keith Weiss

“Impressively, Microsoft has taken leading positions on both fronts, with Azure OpenAI Services representing a compelling platform for companies looking to build (the Picks and Shovels) and a broader portfolio of Generative AI-based application functionality in the market or in preview, like Github Copilot,” Weiss continued.

The bank increased its price target for Microsoft by 24% to $415 from $335. The company’s shares traded up more than 1% on Thursday to $342.85 per share.

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Microsoft’s potential to surpass Apple and reach $3 trillion valuation

A market frenzy for all things AI-related has supercharged Microsoft shares this year. Artificial Intelligence company, OpenAI Inc., which is backed by Microsoft, has fueled much of the excitement amid the viral success of its ChatGPT tool. Microsoft is now looking to overhaul its entire lineup of Office apps including Excel, PowerPoint, Outlook and Word with OpenAI technology.

One key factor contributing to Microsoft’s advantage in the AI arena is its substantial investment of over $10 billion in OpenAI. This investment is expected to provide it with a potential incremental opportunity of $90 billion in 2025 as the company incorporates generative AI technologies into its software offerings.

Azure OpenAI Services, which acts as a platform for companies seeking to build AI applications, and the company’s other generative AI-based functionalities like GitHub Copilot, position Microsoft as both the “picks and shovels” provider and the gold miner in the AI gold rush, according to Weiss.

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Microsoft’s strategy of integrating AI capabilities into its popular software offerings such as Office 365, Azure, and GitHub is anticipated to provide the company with significant pricing power in the future. The impact of AI on the company’s financials is expected to be evident in the near term, as larger datasets contribute to increased revenues for its Azure cloud service. Weiss pointed out that Azure’s consumption pricing model allows for a quick translation of incremental demand into revenues, offering investors good visibility into the company’s strong market position.

“Given the consumption pricing model, the impact of incremental demand flows rapidly into Azure’s revenue, giving investors good visibility into that strong position,” Weiss said.

Despite Microsoft’s stock having risen approximately 40% year-to-date, its valuation remains reasonable compared to historical averages, even with its unrivaled position in the generative AI landscape, according to Weiss’s assessment.