Before potential surge of 15%, a particular Wall Street analyst suggests investing in this AI-focused stock.
Before potential surge of 15%, a particular Wall Street analyst suggests investing in this AI-focused stock.
AI investments have been bustling this year, and notable AI stocks have seen significant gains. For instance, Nvidia has climbed over 183%, while Palantir Technologies has skyrocketed beyond 313%. On the other hand, Microsoft, with its involvement in AI through ChatGPT's parent company, OpenAI, has only managed a modest increase of 14.7%. This trails not only other AI stocks but also the S&P 500's growth of 26.8%.
However, one Wall Street analyst, Tyler Radke from Citibank's U.S. software equity research, anticipates exceptional growth for Microsoft in the coming six months. Here's why he thinks so:
Radke was taken aback by Microsoft's dedication to reducing expenses and improving operational efficiency, especially within the AI sector, where startup costs have been substantial. Post his meetings with Microsoft's investor relations team and CFOs, he maintained his 'buy' recommendation and set a $497 price target for the company's shares, currently trading at around $430 each. This objective marks a 15% increase in share price.
Radke believes that Microsoft's growth figures will show signs of improvement during the initial half of 2025, making it a limited time opportunity for investors to acquire shares before the market recognizes the improvement and raises prices.
Why he could be on point
Radke admired Microsoft's commitment to streamlining costs and enhancing efficiency, specifically in AI, where escalating startup costs are common.
"The theme of cost optimization/efficiency was recurrent throughout each meeting, strengthening our confidence in the company's ability to maintain robust earnings growth throughout the AI investment cycle," Radke communicated to Citibank clients in a note.
Additionally, Microsoft has allocated considerable resources to developing Copilot AI, integrating it into both internal and external software such as Microsoft 365. The company has also invested in training its staff to utilize Copilot to boost efficiency. As the software is now employed, Radke expects productivity at the company to skyrocket.
Improving productivity, he mentioned during an interview with Fox Business News, was formerly associated with layoffs, but now it's about amplifying the productivity of existing staff. "Consider developers using these AI tools such as Microsoft Copilot... they're now 50% more productive."
And there's more to it
The productivity gains and monetization of AI could already be evident in Microsoft's Azure cloud platform. Revenue from Azure increased by 33% yearly in the recent quarter, with AI contributing to 8% of that expansion. Azure anticipates further AI-related expansion during the first six months of 2025. Radke attributes this growth to previous AI-related capital expenditures and increased capacity.
Radke suggests that the high AI capital expenditures have suppressed the stock value, but this will change in 2025. He also expects positive ripples from Microsoft's AI initiatives.
"The high demand for AI services is also driving 'halo effects', compelling customers to seek AI services but staying for the platform (i.e., core Azure) which generally yields higher margins," he penned in his note to clients.
Should investors buy Microsoft?
Microsoft expects its AI initiatives to bring about revenue growth surge during the first half of 2025, and Radke aligns with this outlook. Considering the stock's poor performance in relation to its AI peers and the broader market this year, such growth would likely cause the stock to surge, rewarding early investors.
At about 13 times sales, the company's valuation appears attractive compared to its competitors, but somewhat expensive in relation to its historical average. Thus, investors may prefer to invest gradually. However, early indications point to Microsoft emerging as a strong player in the AI space in the long run.
Given Radke's analysis, Microsoft's dedication to reducing expenses and improving operational efficiency in the AI sector could lead to significant financial gains. This investment in cost optimization and efficiency could potentially attract more investors and boost the stock price, providing an opportunity for substantial returns. Furthermore, the company's investment in Copilot AI and its integration into various software platforms could significantly increase productivity, potentially leading to impressive financial growth.