Microsoft's GitHub Poised for Growth with AI Tools, Analyst Sees $5B ARR Potential

Bernstein analyst Stacy Rasgon maintained a Buy rating on Microsoft Corp MSFT and set a price target of $406.

The GitHub Universe user conference starting Wednesday could shed light on the popularity of AI coding companion tools like GitHub Copilot, which has attracted over 1 million paid users. 

Rasgon estimates the GitHub platform and AI companion tools combined have over $5 billion ARR scale potential over 3-5 years after surpassing $1 billion in ARR last year. 

This small but highly strategic product family could further reinforce Rasgon's bullish stance on MSFT and potential gains as it leverages a first-mover advantage in generative AI. 

The $7.5 billion GitHub acquisition in June 2018 is the 6th largest in Microsoft's history, with one of the highest premiums. 

GitHub ARR tripled during the first four years, surpassing $1 billion last year, driven by increasing enterprise adoption. 

There are over 100 million developers on GitHub today, up 4x from 28 million in 2018. 

It creates an attractive opportunity to cross-sell additional developer tools, including Visual Studio (over 31 million users) and GitHub Copilot (over 1 million users). 

GitHub Copilot has emerged as the leading AI companion tool, helping developers realize up to 55% productivity gains in coding tasks. 

Rasgon estimates this new AI product with $19 monthly pricing for the business SKU could eventually see a 16% attach rate within the GitHub installed base, creating a further $3 billion ARR opportunity alone. 

The potential to scale ARR by 5x over the next 3-5 years is incremental but small relative to Microsoft's overall revenue scale model ($244 billion in FY24E). 

Price Action: MSFT shares traded higher by 1.09% at $356.64 on the last check Monday.