Microsoft's AI push has some analysts raving about the stock even after lackluster earnings

Published Thu, Jan 26 20232:04 PM ESTUpdated Thu, Jan 26 20232:57 PM EST

Microsoft 's earnings report earlier this week was largely considered dissatisfying to analysts. But the tech giant's focus on artificial intelligence, or AI, is keeping some on Wall Street optimistic. The company beat analyst expectations on per-share earnings while missing analysts' revenue estimate in its fiscal second quarter , Refinitiv data shows. Executives said its current quarter would likely also see lower revenue than analysts anticipated as the personal computer market continued contracting. But analysts who cover the stock weren't entirely beating up on it, pointing to AI as a bright spot in the earnings report. The term AI was mentioned about 40 times in Tuesday's earnings call, which Wells Fargo analyst Aaron Rakers said was notably more mentions than prior calls and underscored the technology's importance to the company going forward. "The age of AI is upon us, and Microsoft is powering it," Microsoft CEO Satya Nadella said on the call. "We are witnessing nonlinear improvements in capability of foundation models, which we are making available as platforms. And as customers select their cloud providers and invest in new workloads, we are well positioned to capture that opportunity as a leader in AI." Microsoft announced Monday a multiyear, multibillion-dollar investment in OpenAI, which is the maker of ChatGPT. It did not disclose the size of the investment, though Semafor previously reported Microsoft was in talks to invest as much as $10 billion . Microsoft previously invested in Semafor in 2019 and 2021. ChatGPT, which debuted in late November, is an offshoot of OpenAI language-generation software . The software can carry conversations, with the ability to ask follow-up questions, filter and respond to inappropriate inquiries and admit mistakes, among other features. Nadella called AI the "next big platform wave." He said enterprise business value can be created by "catching" those waves, meaning the technology prompts improvements to existing products and creates new business opportunities for the company. Chief Financial Officer Amy Hood said AI was one area where Microsoft gained share despite overall domestic performance coming in weaker than expected. The 'hottest product in tech' While Bernstein analyst Mark Moerdler called the second-quarter report and third-quarter outlook "disappointing" in a note to clients, he said OpenAI is "the hottest product in tech at this moment." He said in an interview with CNBC that the "real" opportunity for Microsoft will come after the current period of economic tightening ends and spending begins growing again. That's because the value of AI will become increasingly apparent, he said, and Microsoft should be positioned to lead with an array of AI-enhanced products. "The opportunity for Microsoft is the depth and breadth of capabilities," Moerdler said. "The more broader of what they can do, and the deeper and more powerful the capabilities they have in specific areas, is very important because people don't want to use lots of different tools from lots of different vendors." Analysts and company management have argued AI will improve existing products such as Azure and Bing. SVB MoffettNathanson analyst Sterling Auty estimated as much as 76% of Microsoft's aggregate revenue is tied to products that could be improved by OpenAI. Auty said in a note to clients that the partnership should specifically excite long-term investors. Mizuho analyst Gregg Moskowitz said in a note that AI could begin meaningfully influencing Microsoft's "narrative" starting later this year. But not everyone on Wall Street is sold on the strength of Microsoft's position as AI gains favor. JMP analyst Andrew Boone said ChatGPT would likely improve Bing, but not enough to gain meaningful market share or change the current dynamics within online search engines. Boone also said Alphabet has likely developed similar capabilities to ChatGPT for Google without making them publicly available yet. Meanwhile, Wells Fargo's Rakers said an "AI wave" could tee up other winners. He said AI company Nvidia will have "derivative focus," while Arista Networks is well positioned as AI's fabric gets expanded. — CNBC's Michael Bloom contributed to this report.