On the day when US stocks fell across the board, why didn't Microsoft decline?

"Non-farm Payrolls" triggers expectations of aggressive rate hikes by the Federal Reserve. The three major US stock indexes fell for two consecutive days to a one-week low, while Microsoft rose more than 0.9%, marking its second consecutive day of gains and reaching a high not seen since June 16th in the Dow Jones Industrial Average. Microsoft's stock price has risen 42% since the beginning of the year, reaching $341.27.

Why is Microsoft not falling?

Morgan Stanley analyst Keith Weiss stated in a recent report that Microsoft has become their top choice among large software companies, and AI will help Microsoft take off and become the second technology giant with a market value of $3 trillion, following Apple.

At the same time, Morgan Stanley raised Microsoft's target price for the next 12 months from $335 to $415 and maintained an overweight rating on the stock. This also means that Microsoft still has about 21.6% upside potential from yesterday's closing price, and its market value will reach about $3.1 trillion.

Morgan Stanley rates Microsoft as the top choice among large software companies

Morgan Stanley analysts believe that generative AI will significantly expand the scope of automated software business, and Microsoft is in the most advantageous position in the software field to profit from this trend.

Weiss pointed out that although Microsoft's stock price has risen 42% this year, the valuation is still reasonable:

Microsoft's PEG ratio (the ratio of price-to-earnings ratio to expected earnings growth rate) is still at historical average levels.

At the May developer conference, Microsoft announced that Microsoft Copilot will be launched in June. On the last day of June, Microsoft fulfilled its promise, and Copilot, powered by GPT-4, has been fully integrated into Microsoft.

Since Microsoft Copilot is built on the same foundation as Bing Chat, Microsoft allows developers to extend the plugins they have written for ChatGPT and Bing Chat to this AI assistant. This means that ChatGPT, Bing, Dynamics 365 Copilot, Microsoft 365 Copilot, and Microsoft Copilot can share more than 70 third-party plugins. According to compiled data from Bloomberg, Morgan Stanley's target price is second only to the investment bank Redburn's target price of $450. Since the beginning of 2016, Morgan Stanley has consistently given Microsoft a buy rating, and the stock has risen more than 500% during this period.

In the past few years, Microsoft has invested billions of dollars in AI startups behind ChatGPT, and Microsoft Azure is the exclusive cloud service provider for OpenAI, with close cooperation between the two parties.

In the first half of this year, Microsoft, as a leader, has outperformed competitors such as Alphabet-C and Amazon in the AI wave sparked by ChatGPT. The excellent experience of AI integration into products such as Bing search has consolidated Microsoft's business landscape and driven robust growth in Azure.

Wedbush analyst Dan Ives pointed out in his report on Wednesday that Microsoft's monetization of AI is progressing faster than market expectations. It is estimated that for every $100 spent on Microsoft's cloud service Azure, $35-40 is spent on artificial intelligence. Microsoft's "monetization opportunities" in the AI field are earlier than expected.

Ives believes that ChatGPT will be Microsoft's "next growth driver" and will help drive stock price growth. The company may reach a market value of $3 trillion in early 2024. He rates Microsoft as "outperform" with a target price of $375.

However, the target price of $375 set by Ives for Microsoft may be too conservative compared to the $3 trillion market value target. Microsoft's current price is $338, and in order to reach the $3 trillion threshold, the stock price needs to reach $403.47.

Among the 51 analysts surveyed by FactSet recently, 43 analysts gave Microsoft a "buy" rating, 7 analysts gave a "hold" rating, and 1 analyst gave a "sell" rating. However, only 3 of these companies' analysts believe that Microsoft's market value will exceed $3 trillion next year.