News

Results of Microsoft's Big AI Bet? An 'Additional $31 Billion' in Revenue

• By David Ramel
• 08/21/2023

Microsoft famously got a head start in the enterprise AI races by investing more than $10 billion in industry leader OpenAI, creator of the famous ChatGPT chatbot whose tech now powers a wide swath of Microsoft products and services.

The investment into the former AI research company resulted in Microsoft infusing advanced generative AI tech into everything from Bing search to Microsoft 365 office apps to even Windows itself. Of course, prices of some of those wares for enterprises and consumers have risen accordingly.

What's more, it gave Microsoft a leg up in the cloud giant AI races, as Google reportedly declared a "code red" to catch up, while Amazon Web Services has launched several less-publicized AI initiatives of its own.

So how much is that massive $10 billion-plus investment paying off in terms of Microsoft's bottom line? The finance wonks at investment-focused Seeking Alpha have weighed in, listing:

• Microsoft's AI Co-Pilot (sic) initiatives could potentially add 23 percent to run-rate EBITDA.
• The adoption of Co-Pilot (sic) in Microsoft Office products could result in an additional $31 billion in run-rate revenue.
• Azure is well positioned to capture share in the enterprise software, IT services, and communication services markets.

"Whilst AI Co-Pilot (sic) initiatives are only just starting to be rolled out and the ultimate adoption rate among clients is unknown, these new products could add potentially 22.5 percent to run-rate EBITDA," the company said in an Aug. 20 article titled Microsoft: Sizing Up The AI Opportunity. "The cloud hyperscalers have grown in disciplined fashion and companies globally are still in the early phases of migrating on-premise workloads into the public cloud. With the AI theme in its infancy, we are in a period of extraordinary innovation driven by both enterprise and consumer interest. With the potential to be a key beneficiary, MSFT is attractively valued on a 29.7x forward P/E ratio."

We think that means the company is sitting pretty and making a lot of money or poised to make a lot of money from its massive AI investment. For non-finance wonks, EBITDA stands for earnings before interest, taxes, depreciation and amortization. Run-rate revenue is a way to forecast sales that takes available data and projects it into the future to provide revenue estimates. The price-to-earnings ratio, meanwhile, is a quick way to determine if a stock is undervalued or overvalued. One article tells us that the lower the P/E ratio, the better, with the average being between 20-25, but that doesn't seem to jive with Seeking Alpha saying "a 29.7x forward P/E ratio" is attractive. Other guidance says, "P/E ratios can be misleading if looked at without considering a company's recent history," so an attractive one may be one that is consistent or shows consistent growth.

Anyway, the $10 billion-plus bet seems to be paying off already.

"Given the infusion of AI into the Microsoft Office suite of products offers significant productivity benefits, the potential revenue enhancement is vast," Seeking Alpha said. "It will be interesting to see what take-up will be across the current 345 million Office 365 user base but a 25 percent penetration rate by 2026 would result in an additional $31 billion in run-rate revenue."

In fact, Seeking Alpha believes that as the Microsoft's productivity enhancements become more demonstrable and uptake increases, Microsoft stock may see further multiple expansion beyond that of the 10 percent already enjoyed this year, driven by the prospect of structurally higher profitability.

"In essence, Microsoft builds AI technologies for users to leverage or implement, but also infuses AI into its own products which enhance customers' productivity," yesterday's article says. "The core business model is very sticky and the use case of AI in areas such as coding have already been clearly demonstrated by Microsoft's Github (sic) Co-Pilot (sic) initiatives."