How this Mag 7 name ‘puts revenue on the board’

Apple (AAPL) is losing billions in value following Thursday’s Justice Department lawsuit citing the company’s alleged monopoly in the iPhone market. The tech giant is just one of three ‘Magnificent 7’ stocks to underperform this year. However, KeyBanc has initiated coverage for Microsoft (MSFT) as Overweight, with a price target of $490.

Keybanc Managing Director of Software Equity Research Jackson Ader joins the live show to discuss his call.

What sets Microsoft apart from other technology names is its AI monetization capabilities, Adler points out. The analyst explains that Microsoft generates revenue through Keybanc’s preferred routes: measuring workloads to the cloud and monetizing directly from the co-pilot. “They’re actually putting revenue on the board, whereas for a lot of other software companies it’s speculative right now,” Adler says.

In surveys from Keybanc, Adler continues, CIOs claim that Microsoft has AI capabilities that are “superior” to those of other vendors: “Customers say this is where we want to go for AI,” Adler concludes.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor’s note: This article was written by Gabriel Roy.

Video transcription

Well, tech stocks, they’re always in focus. Apple lost billions in value after the DOJ filed an antitrust lawsuit yesterday, citing the company’s alleged monopoly in the iPhone market. Apple is grossly underperforming so far this year. It is one of only three Mag Seven stocks that are underperforming the S&P 500, the others being Tesla and Alphabet.

However, our next guest says there’s one Mag Seven name that’s still a bargain, and he looks at Microsoft stock. This year they are up about 14%, outpacing the S&P 500. Today they are only down about 2/10 of a percent. But KeyBanc initiated coverage of Microsoft as it considered its $490 per share price target.

With us is the analyst behind that call. We have Jackson Ader, he’s KeyBanc’s director of software equity research. Jackson, it’s great to have you here. So talk to me about the bull case you see for Microsoft right now, and why they are among the best positioned within the AI ​​space.

JACKSON VEIN: Sure, yes. Thanks for having me, Shauna. So there are really a few things we like about Microsoft. The first is in the field of AI. There are actually three ways you can monetize AI, and they lead the two ways that we actually like. So between Azure measuring some of the move to the cloud (more workloads moving from AI to the cloud) and monetizing directly from Copilot, $30 per user per month is a pretty easy way to actually get a return on all those investments.

They are really in AI. They are leaders. They’re actually putting revenue on the board right now, whereas with a lot of other software companies it’s speculation and it’s the future. So as far as AI is concerned, these are the two bull cases.

And Jackson, there’s been some discussion about Azure’s growth at this point – it’s a mix between AI and non-AI, and some have taken issue with that mix. The fact that AI is playing a bigger role in this – should that actually be seen as a good thing? A bullish view for the stock at the moment?

JACKSON VEIN: Yes. It doesn’t bother me that much. I’m not sure why I should view the – I’ll call it the first generation, right – the move from on-premise to the public cloud as a positive, and the AI ​​workloads as something else. Now I understand the backlash that might come from the partnership with OpenAI, and it’s a quasi-credits-acquisition relationship, where the revenue might not be as high, especially as it relates to OpenAI.

But I think if the company is talking about more AI workloads on Azure that will come from inference, I’m encouraged by that. That should be trickier in my opinion than training the models, where you might have a big spike in initial training, but you have a more sustainable workload due to inference. So I’m not really bothered by the gap between AI and calling it the traditional public cloud. And we’re seeing from other public cloud vendors that the first generation – just plain vanilla, call it public cloud – is actually starting to accelerate again. We’re past the optimization cycle, so I see them both as tailwinds.

I mean, look at the software space here, and the catalyst you just laid here from Microsoft stock. How does that compare to some of those rivals, and why do they have that – or what really gives them that edge, or how big is that edge in the long term?

JACKSON VEIN: If you ask CIOs whether it’s the strategic vendors, or just the public cloud vendors, and the AI ​​capabilities, Microsoft dominates. More CIOs responded saying Microsoft had artificial intelligence capabilities superior to any other – than any other vendor, even doubling down on the next rival in AI. It’s hard to tell how much of that is actually tied up in the relationship with OpenAI, but customers say this is where we want to go with artificial intelligence. This is where we want to go for the sellers.

In terms of some of the other competitors, I actually think what we saw a few weeks ago at Oracle was getting results, where Oracle Cloud Infrastructure was posting good numbers and good growth. And the backlog on that OCI number was enormous – vastly exceeded expectations. That’s, I think, a validation point in artificial intelligence pushing more workloads into public clouds. And so we look around at competitors and say we’re getting some validation, and customers and CIOs say Microsoft stands alone here as a strategic supplier. And that should be good in the longer term.

Jackson, if you look at some of your other coverage within the software and enterprise space here, you also like ServiceNow, you like SAP, you like Oracle. As you just said: what is that common thread? Is it just about AI, the plans there, and what that will do to the bottom line of these companies? Because it’s a little different when it comes to each of those bull cases that you’ve laid out for these top names.

JACKSON VEIN: Right. So it’s not just about AI. And we can go through some of the details of that. But if you think about Oracle, there’s certainly a lot of their growth – and they’re getting into that one metric mode where the quarters are defined by: did OCI grow at this percentage, or did it grow at this percentage, plus or minus a few? And so I understand that as far as Oracle is concerned, we may be getting into the AI ​​drivers.

But SAP, ServiceNow and Oracle also only have large cloud platforms, specifically around the ERP players, i.e. SAP and Oracle. As their cloud applications mature and you start to see the benefits of not only the efficiencies of moving applications to the cloud, but also the product improvements that should come with faster innovation and faster time to market, they should can close the competitive gap with the pure play cloud competitors in the ERP and HCM space. And so that should help gross retention, it should help net retention, and I think there are reasons for cloud applications why you should own Oracle and SAP.

ServiceNow, it – very quickly – ServiceNow, it is the ultimate platform. And we said during our initiation: ServiceNow can see where the puck is going, and skate there. Because they can use seemingly any workflow automation tool for any use case. They are the ultimate platform in an industry where everyone says they want to buy a platform.

Of course. We’ve seen a strong move here from ServiceNow. I look at the year to date chart, up about 13%. But one year, an increase of almost 80%. Jackson Ader, great to have you here. I look forward to welcoming you back here on Yahoo Finance soon.

JACKSON VEIN: Thanks, Shauna.

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