Microsoft's bet on AI is still in its early days. But there are signs it's already paying off.
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- Microsoft's partnership with OpenAI has lead to a new wave of innovation in artificial intelligence.
- There are already early signs that the Microsoft-OpenAI partnership is paying off, analysts say.
- Analysts say there is still work to be done, but "Microsoft is leading this tech AI arms race."
Microsoft's team-up with ChatGPT maker OpenAI has unleashed a new wave of innovation in artificial intelligence.
It's already shaking up the industry. Microsoft's integration between OpenAI and its Bing search browser is putting pressure on Google's monopoly on search. And the viral success of ChatGPT has seemed to lend more credibility to Microsoft's Bing.
That had analysts cautiously optimistic about Microsoft's investment in AI — and the company's quarterly earnings report released Tuesday showed the investment is already starting to pay off.
CFO Amy Hood said on a call with analysts that Microsoft expects revenue growth at its cloud division, Azure, to be 26% to 27% next quarter from the same quarter the year prior — with "roughly 1 point from AI services."
Wall Street analysts took that as a sign that Microsoft's big bet on AI is already leading to financial gains. And that's a sign of even more growth to come.
"This is a huge number, and while AI has been part of the Azure story for years, for AI to already generate 1% incremental growth, shows that demand for AI — especially post the GPT announcements — is going to be a big driver of Azure," Bernstein analyst Mark Moerdler wrote in a note to clients.
He added that this is an indicator that Microsoft could be surpassing Google in the AI space, and that Azure could be set to become "a bigger and more important hyperscale provider" than Amazon Web Services, or AWS.
And investors seemed to like what the heard, bidding Microsoft stock more than 7% higher on Wednesday. It's up more than 23% so far this year, compared to a 6% gain for the broader market.
On the call with analysts Tuesday, Microsoft CEO Satya Nadella emphasized that investing in the "new wave" of AI, and expanding the company's market share, was a top priority.
Several analysts had questions around the value that the OpenAI partnership is contributing to the company, given that Microsoft announced a $10 billion investment in the company earlier this year.
Nadella said the company's work in AI is leading to new conversations with customers that are resulting in new revenue streams. That seemed to be a good sign to analysts, who said Microsoft is on the right track for monetizing its AI investments.
"While the AI platform shift is early on and monetization still forming, management sounded as bullish as you'd expect on the market opportunity," RBC's Rishi Jaluria said in a note to clients.
Wolfe Research's Alex Zukin shared that sentiment and said "we also think the OpenAI masterstroke is driving both significant innovation inside the portfolio (Copilot & Teams Premium) but also as a means to drive new workloads."
Ultimately, Wedbush analyst Dan Ives said, "the AI story is still in the first inning," but, he said, "Microsoft is leading this tech AI arms race."