Non-deal roadshows (NDRs) are pivotal events for institutional investors, providing an exclusive opportunity to gain insights into a company’s operations, strategies, and growth prospects directly from its management team. These engagements offer a level of depth and understanding that cannot be achieved through public disclosures alone, allowing investors to assess a firm’s narrative and future trajectory.
During a recent NDR attended by Stifel’s Brad Reback, a highly regarded analyst, and members of Microsoft’s Investor Relations (IR) Team, the discussions underscored the tech giant’s promising outlook. Reback expressed confidence in Microsoft’s position, noting that the company is not merely catching up but leading in emerging technology trends for the first time in over two decades.
A focal point of investor inquiries was Microsoft’s AI revenue, which currently contributes 6% to its overall revenue. Reback estimated this to be around $800 million, indicating a notable increase from previous quarters. Interestingly, Microsoft clarified that the majority of this AI revenue is derived from inferencing rather than training workloads, highlighting the company’s diverse revenue streams within the AI space.
Moreover, Microsoft emphasized its collaborative R&D partnership with OpenAI, which plays a significant role in shaping its AI capabilities. Notably, the company clarified that the fundamental GPU training usage of models like ChatGPT, developed by OpenAI, is not reflected in Azure’s revenue figures. This underscores Microsoft’s strategic focus on leveraging partnerships and cutting-edge technologies to maintain its competitive edge in the AI landscape.
Overall, the insights gleaned from the NDR suggest that Microsoft is well-positioned to capitalize on the growing demand for AI-driven solutions, leveraging its scale, infrastructure, and collaborative partnerships to drive future growth and further distance itself from competitors.
Aside from the direct revenue contribution from GenAI on Azure, Microsoft’s management highlighted during the NDR that these AI workloads also drive significant usage of other Azure services, particularly those related to data management, security, and governance. This underscores the broader impact of AI adoption within Microsoft’s ecosystem, extending beyond direct revenue streams to bolstering usage across various Azure offerings.
Examining Microsoft’s AI infrastructure as a service (IaaS) and platform as a service (PaaS) opportunity, analyst Brad Reback believes there is substantial growth potential. He suggests that these AI workloads could effectively double Azure’s Total Addressable Market (TAM), given the rapid adoption and revenue growth trajectory. Reback notes that while it took Azure around three years to reach an annual revenue of approximately $1.9 billion in fiscal year 2016, AI IaaS/PaaS workloads are on track to achieve a run-rate of over $7 billion within just six quarters since their launch.
Investor inquiries also delved into the adoption, usage patterns, and initial customer satisfaction with M365 Copilot, Microsoft’s AI-powered productivity solution. Management expressed optimism about the product’s current state, citing positive feedback from customers, particularly among organizations implementing the solution at scale. Reback emphasized the potential for accelerated adoption of M365 Copilot, given the significant operational benefits it offers to enterprises.
Reback maintains a Buy rating on Microsoft, with a price target of $455, representing potential gains of 9.5% from current levels. This assessment aligns with the consensus view among Reback’s peers, with the vast majority of analysts bullish on Microsoft’s prospects. With only a few dissenting opinions, the consensus among analysts is a Strong Buy, with an average price target of $469.34, implying a 15% upside potential over the coming months.