Microsoft Leads AI Race Despite M365 Copilot's Slow Start: Analyst

Piper Sandler analyst Brent Bracelin reiterated Microsoft Corp MSFT with an Overweight and a $455 price target.

After attending several developer sessions at the Microsoft AI event in San Francisco today, the analyst remained encouraged by the momentum around the most mature AI products (GitHub Copilot and Azure AI) but felt the new 3-month-old M365 Copilot remains in the early enterprise adoption phase. 

Microsoft remained his favorite AI All-Star stock, but tactically, after the 57% move in 2023, it might need further AI proof points and time to grow into the premium multiple over the next 3-6 months. 

Regardless, Microsoft has a first-mover advantage in AI that makes this a core growth holding. 

GitHub Copilot Enterprise (scheduled to GA in February) features enough compelling enhancements to justify the $39/month price point (vs. GitHub Copilot individual pricing at $10/month and business version at $19/month). 

The number of GitHub Copilot users has scaled quickly to 1 million+ paid developers as of November 2023. 

December traffic to www.github.com has accelerated year-on-year for three consecutive months, reinforcing strength. 

The Data Renaissance theme surfaced in several developer sessions. M365 Copilot use cases were dependent on aggregating data into Microsoft Graph. 

Large enterprises can leverage Microsoft Fabric as an alternative to complex and costly ETL tools. 

New integrated vectorization services coming to Azure AI Search should have increasing importance for retrieval augmented generation (RAG). 

Vector database has emerged as a hot new data category. Still, AI experts are now recommending a hybrid GPT approach using a combination of 1) vector, 2) full-text search, and 3) semantic ranking. 

Microsoft Fabric appears more complementary than competitive to Snowflake Inc SNOW.

The commentary on M365 Copilot was surprisingly light. There were several sessions on further augmenting the value of the M365 Copilot stack (GA in September 2023) by leveraging external data sources and third-party applications. 

That said, there weren’t many new inputs or comments at this developer-centric event. 

It reinforces the analyst’s view that M365 Copilot could take time to scale, particularly for large enterprises. 

Data governance hurdles might take precedence over productivity benefits in the near term. 

Broad internal AI adoption is helping accelerate the innovation cycle. Several employee conversations hinted at broad-based internal adoption of GitHub Copilot and M365 Copilot that is not only helping accelerate the internal innovation cycle (46% of code recommended by AI) but also hints at the stickiness of AI with every discussion suggesting no interest in going back to a life without a Copilot.

The analyst projected Q2 revenue and EPS of $61.16 billion (versus consensus of $61.13 billion) and $2.75 (versus consensus of $2.78).

Price Action: MSFT shares are trading higher by 0.85% at $387.92 on the last check Friday.

Also Read: Microsoft Grapples with Security Concerns Over Beijing AI Lab

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