Microsoft's AI Cloud Computing Services Show Strong Profitability Potential
According to Bernstein, Microsoft's cloud-computing services for artificial intelligence (AI) are projected to be even more profitable than initially anticipated. Analyst Mark Moerdler has reaffirmed his Outperform rating on Microsoft stock (ticker: MSFT), with a slightly increased price target of $400 for the shares, up from $398.
Despite closing 0.1% lower on Tuesday at $328.65, Microsoft has emerged as a leader in developing Generative AI offerings, platform software, and design architectures that enable clients to maximize the value of their data and AI capabilities. The company is taking proactive steps by heavily investing in GPU (graphics processing unit) / AI supercomputers to meet the surging demand in this space.
Moerdler has estimated that a cloud computing vendor such as Microsoft could generate approximately $1.50 per hour, or around $1,000 per month, from just one Nvidia (NVDA) A100 GPU. Based on financial modeling, he suggests that the GPU rental business alone could yield a formidable 42% gross margin without factoring in any additional software or services. This indicates that the negative impact on Microsoft's Azure margins from Generative AI is actually smaller than expected.
Furthermore, Moerdler believes that Microsoft's inclusion of more high-profit-margin technologies, including pre-built AI models and other AI services, is likely to drive both revenue and profitability higher. The company has expressed optimism about its AI prospects, with CFO Amy Hood confirming earlier this month that Microsoft's suite of AI tools is on track to reach $10 billion in revenue faster than any other software business in the company's history.
Overall, Microsoft's commitment to becoming a dominant force in cloud computing for AI is gaining momentum, and the potential for increased profitability appears promising.
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