Microsoft's AI Alignment Boosts Investor Confidence According to Morgan Stanley

Morgan Stanley analyst Keith Weiss reiterated an Overweight rating on Microsoft Corp MSFT with a price target of $415.

Weiss highlights that the MS 3Q23 CIO survey suggests stabilization in IT spending growth in the near term, with expectations for 2023 holding at +2.7% YoY sequentially and early reads offering modest acceleration in 2024 at +3.4% (+64 bps YoY). 

He continues that expectations for an acceleration in IT spending into 2024 appear supported by CIOs’ interest in Generative AI and Large Language Models, with 66% of CIOs indicating that these technologies are directly impacting IT investment priorities (vs. 56% of CIOs in 2Q and 45% in 1Q). 

Hyperscalers are still essentially the favored vendors for CIOs in assisting in applying innovative technologies. 

Overall, Microsoft continues to screen well with favorable alignment to key secular AI themes and 1) scope to monetize Generative AI across its broad portfolio and 2) leverage to consumption pricing (via its Azure Cloud business), enabling investors to see any pick-up in demand earlier. Furthermore, he believes that Microsoft has exposure to the categories that top the most influential CIO priorities (Security, AI/ML, and Cloud Computing), helping Microsoft to maintain its position as the #1 share gainer of IT wallet on a 1-year and 3-year view. 

All these factors, combined with a valuation still at a discount to peers, 27X CY24 GAAP EPS (or 1.5X PEG) vs. large cap average 1.6X, support Keith’s conviction in Microsoft as his Top Pick and continues to see room for shares to move higher. 

Price Action: MSFT shares traded lower by 0.41% at $328.47 on the last check Tuesday.