Wells Fargo: Microsoft's AI revenue is expected to exceed $100 billion, raising the target price to $585

According to Zhitong Finance APP, Wells Fargo maintains an "Overweight" rating on Microsoft (MSFT.US) and raises the target price from $565 to $585. The bank emphasizes Microsoft's "ambition in artificial intelligence (AI)" while noting that it is still in the early stages.

The analyst team led by Michael Turrin at Wells Fargo states that their analysis of Microsoft's AI business indicates that revenue from this segment could exceed $100 billion by fiscal year 2029. They also expect that this year, Microsoft's AI narrative will increasingly shift towards the application layer/Copilot.

Analysts remain optimistic about Microsoft's positioning and future development prospects.

Analysts noted that despite significant capacity constraints, Microsoft has expanded its annual recurring revenue (ARR) for its AI business to $13 billion in less than three years, marking the fastest business expansion in its history.

Analysts estimate that by the fiscal year ending June 2025, the size of this business will approach $20 billion and will further expand as restrictions ease/increased capacity. In an optimistic scenario, by fiscal year 2029, revenue from this business could grow to over $100 billion, with a year-on-year growth rate of net new revenue exceeding 25%. In the baseline scenario, analysts predict that the business will see double-digit growth in net new revenue each year, with AI business revenue exceeding $80 billion by fiscal year 2029.

Turrin and his team state that despite reports of ongoing negotiations between Microsoft and OpenAI, they believe that existing contract agreements will see little change unless there is a significant increase in Microsoft's net revenue share (i.e., exceeding 20%); an extension/expansion of IP access and the duration/scope of contracts (i.e., beyond 2030); or changes to profit caps/terms (i.e., removal of AGI terms).

Analysts add that they do not expect many other changes, aside from Microsoft's abandonment of exclusive capacity rights in January 2025 (which is beneficial for all companies).

Analysts expect Copilot to begin reaching critical scale in fiscal year 2026. Over time, analysts estimate that as long as market penetration reaches 10% and appropriate discounts are applied, Microsoft Copilot will achieve $12 billion in annual recurring revenue.

As of the time of publication, Microsoft is up 0.42% in pre-market trading, priced at $492.165