Microsoft's stock may be an AI winner - but it's not acting like one

By Emily Bary

Morgan Stanley says the stock looks 'well underpriced' in part due to heavy corporate enthusiasm for the company's AI offerings

Microsoft's stock has fallen in recent months alongside broader pressure on the software sector.

When you ask information-technology executives where they're growing their artificial-intelligence spending, they're most likely to mention Microsoft, according to Morgan Stanley analysts.

But investors have treated Microsoft's stock (MSFT) with skepticism recently. It's down 10% over the past three months, corresponding with persistent weakness in the software sector.

See also: Microsoft's business is on fire. So how can its stock break from its curse?

"Microsoft remains best positioned to capture incremental share of [generative AI] spend and IT budgets, which is not reflected in shares," analysts led by Keith Weiss wrote on Wednesday. Microsoft's stock trades only at 23 times GAAP earnings estimates for next year, he noted, a discount to software peers both on an absolute basis and when factoring in the company's growth. In other words, it's "well underpriced."

The company has a leadership position in AI that "remains clear" following Weiss's recent survey of chief information officers. Microsoft received a 78% "net score" when factoring in the percentage of CIOs who expected to boost their spending with the company versus those who expected to reduce it.

Microsoft Azure is the preferred cloud provider, according to Weiss, with Amazon.com's AWS ranking second and Alphabet's Google Cloud third. "As workloads shift to the cloud, Microsoft and Amazon remain the clear beneficiaries," he noted.

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Specifically when looking at generative-AI offerings, 92% of CIOs expected to adopt those from Microsoft in the next 12 months. Popular choices include Microsoft 365 Copilot for the Office suite, Github Copilot for coding and Azure OpenAI Services, which allows enterprises to run models.

A common concern around the AI trade is that companies are spending a lot of money to build out AI infrastructure but aren't seeing commensurate returns in terms of paid uptake. But Weiss sees "continued enthusiasm" around Microsoft and broadly expects revenue growth to accelerate and operating margins to expand.

Weiss also called out some cybersecurity takeaways from the survey, including mixed results for Microsoft. The company was no longer the top gainer of market share in endpoint security, as that position belonged to CrowdStrike Holdings (CRWD). But in identity and access management, Microsoft was the leader in market-share gains, taking over from Okta (OKTA).

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-Emily Bary

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