Amazon (NASDAQ:AMZN) has reportedly agreed to pay Microsoft (NASDAQ:MSFT) $1 billion over five years to enable 1 million of Amazon’s employees to utilize MSFT’s Microsoft 365 “cloud productivity software.” Microsoft 365 is MSFT’s cloud-based offering that includes all of the company’s well-known apps, including Teams, Word, Excel, PowerPoint, and Outlook. Also included in Microsoft 365 are several other apps, including SharePoint, a tool that allows users to build websites, and the firm’s OneDrive, a data storage program. The fact that Amazon was willing to shell out so much money to utilize the software of Microsoft, its cloud rival, bodes very well for the overall future of MSFT and MSFT stock.
Amazon Was Likely Attracted by MSFT’s AI Prowess
Amazon has its own productivity “toolset and offerings,” but it chose to pay a great deal to utilize MSFT’s software instead of either using its existing tools or upgrading them.
“I just think the generative AI phenomenon that’s happening this year is giving [Amazon and AWS] a new outlook on everything,” an unnamed “top executive” whose company partners with both MSFT and AMZN told The Channel Co CRN.
Based on that statement, I believe that Amazon likely chose to utilize Microsoft 365 because of the AI features that MSFT has added to the latter product and its other offerings.
Specifically, Microsoft has been integrating “AI-powered copilots” into many of its offerings, including Microsoft 365 and its Windows operating system. In late September, the software giant announced that it would launch a single AI assistant, Microsoft Copilot, that will, using AI and data, help users perform tasks across all of MSFT’s apps, including 365, its Bing search engine, its web browser, and other apps. Additionally, the firm indicated that Copilot would utilize IT security tools.
CoPilot started rolling out in September, and the app is expected to continue to be released in stages throughout the fall.
The Implications of Amazon’s Decision for MSFT Stock
Amazon’s decision to utilize 365 suggests that Microsoft’s AI is superior to that of AMZN and other companies whose products compete with 365. As a result, 365’s global market share is likely to stay very high and could even meaningfully increase.
Moreover, I believe that Microsoft will probably be able, in the longer term, to charge much more for 365 than it does now because of the effectiveness and helpfulness of its AI.
Further, the strength of MSFT’s AI should make its other offerings, such as its GitHub computer programming platform and its cloud infrastructure offerings, more attractive to many companies.
Given these points, I believe that the company’s AI should cause its top-and-bottom line growth to meaningfully accelerate over the longer term.
Multiple Analysts Praised Microsoft’s Q3 Results
Also boding very well for Microsoft and MSFT stock is the fact that many of Wall Street’s analysts reacted very positively to the firm’s recently reported quarterly results.
For example, British bank HSBC upgraded MSFT to “buy” from “hold,” calling the firm’s AI offerings “compelling” and predicting that its sales growth would beat the Street’s average estimates going forward. The bank raised its price target on the shares to $413 from $347.
Further, investment bank Piper Sandler called CoPilot “an iPhone moment” for MSFT stock, suggesting that the shares will get a tremendous boost from the AI tool. Piper believes that Copilot could eventually generate more than $100 billion of annual sales for MSFT.
An Attractive Valuation
Given Microsoft’s tremendous potential, the stock’s current forward price-earnings ratio of 30 is quite low.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
