Microsoft 'positioned the best' to drive AI adoption

Mon, Dec 18, 2023, 8:21 AM

Havemeyer believes the revenue and profit opportunities for Microsoft in this space are significant. He forecasts potential EPS reaching as high as $2.17 by fiscal 2026, driving his current $430 per share price target. His projections are based on monthly usage fees between $10-30 across Microsoft's AI portfolio.

With what Havemeyer calls an "enterprise-capable and ready" approach to delivering business-focused AI, he argues Microsoft is "positioned the best" to drive widespread adoption of AI in the market.

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Video Transcript

- Microsoft is betting big on AI from its partnership with OpenAI to its Azure ecosystem here. And after the tech giant's latest announcement with Copilot, our next guest saying that investors should be taking notice. He's calling shares undervalued for its AI opportunities. We want to bring in Fred Havemeyer. He is a Macquarie's head of AI and software research, joining us now. Fred, it's great to have you here.

So you're saying, at least making the case, that you think Microsoft shares are undervalued right now given the potential that we're seeing from Gen AI and Copilot. So what does that profit potential look like?

FRED HAVEMEYER: Thank you very much for having me on again here. So what we think is that when we're taking a look at the overall generative AI opportunity for Microsoft, we see a number of different avenues through which the company can monetize generative AI. Quite clearly, it's Copilot product portfolio is one of them.

So when we assess this landscape, we take a look at both the revenue opportunity and the profit potential. And we estimate that by fiscal year 2026, that Microsoft could generate an incremental, about $0.49 of EPS per share in our base case of monetization, which includes our base case of uptake of the Copilot product portfolio across Microsoft 365 and also across the GitHub Copilot product portfolio.

And within that, we also see an opportunity in our bull case for this to rise more towards $2.17 per share of EPS uplift by fiscal 2026 in the eventuality that the uptake exceeds our expectations and that the profitability of generative AI is actually running at the high end of our estimates.

So I think ultimately, what we find is that we found the opportunity to raise our target price to about $430 based on a DCF analysis, and we're extremely optimistic about Microsoft's ability to drive profitable growth with its Copilot product portfolio.

- What type of pricing power do you also bake in to the expectations in the calls here?

FRED HAVEMEYER: We're using the base case here that it's priced at about $30 per user per month for the Microsoft 365 Copilot product portfolio. And looking across the entire GitHub suite of products, we're looking again at just, on the individual side, that users are paying the typical $10 per user per month. And on the business side, we're seeing business adoption of GitHub Copilot trending with the base case again here of just about $19 per user per month. Not assuming that we see uptake yet of the more premium-priced enterprise skew, which the company has recently announced.

- Yeah. What do you think the uptake rate then looks like for that when you take a look at some of those longer term fundamentals and longer term expectations, and how do you see this playing out with the rise that we've seen in competition?

FRED HAVEMEYER: I think that Microsoft has such a substantial distribution channel already and is also, with Azure, able to distribute its software in an enterprise capable and readied way. Specifically in this case actually, meaning that it's able to address enterprise security requirements, data privacy requirements, and so forth, which has been keeping many enterprises on the sideline with some other third party vendors of generative AI software and solutions, that we think that it is positioned the best in the marketplace to drive uptake of generative AI products and services.

And so our uptake rates over time here trend in a direction where you're seeing material but not necessarily massive uptake in our base case of each of these products and services, sticking in around the single digits for Microsoft 365 Copilot but then trending up into the double digits uptake rate towards 25% for GitHub, where we think that more technical users may be able to pull in this already very well-reviewed product into their organizations to solve problems that they're facing day to day.

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Microsoft 'positioned the best' to drive AI adoption

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