Stock Market

When it comes to Microsoft (NASDAQ:MSFT) and its big move into artificial intelligence (AI), things are moving quickly. Is this a sign of near-term upside ahead for MSFT stock?

That’s the question many investors may be asking now, as the tech giant prepares to monetize the chatbot technology it has recently integrated into its Bing search engine. As reported by Reuters on Feb. 17, the company has begun pitching the advantages of its generative AI-based search platform to major advertising agencies.

Pretty soon, the company could be generating substantially more revenue from a chatbot-enabled Bing. Much of this will fall straight to the bottom line. However, even if the company continues to move fast while Google parent Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) AI endeavors remain a work in progress, will this produce a big boost for the stock?

Let’s dive in and find out.

MSFT Stock and Its Potential AI Payoff

It’s only been a month since Microsoft solidified its partnership with OpenAI. That’s when the company announced its multi-billion-dollar investment in the ChatGPT developer. Thanks to this deal, Microsoft has secured the ability to integrate the AI lab’s technology into Bing and other platforms.

But now, given the monetization news, the company may soon be able to receive a payoff from its massive investment in this potentially disruptive technology. Admittedly, at this point, it is difficult to determine how much increased revenue/profitability may result from Microsoft’s chatbot endeavors.

However, the company has stated that each additional percentage point of market share that Bing gains in the search market equates to $2 billion in additional revenue. If generative AI search enables Bing to increase its advertising conversion rate, it’s possible that the platform may also be able to increase how much revenue it generates per click.

Although AI-powered search queries cost 10 times more than traditional keyword searches, the incremental margins will likely be high. So, what does the prospect of accelerated growth for Bing mean for MSFT stock in the near to medium term? Again, it’s up for debate.

Is This Catalyst Already Priced-In?

Since the chatbot monetization story broke last week, one sell-side analyst (Wedbush’s Dan Ives) has already come out with a take on what this development means for shares moving forward.

According to Ives, Microsoft’s monetization of this technology could add $20 per share to the MSFT stock price over the next 12 to 18 months. That said, one could argue that MSFT’s lift in price since late January at least partially prices in the chatbot monetization catalyst.

Although shares have pulled back in recent days, MSFT remains up by around $12 per share, compared to where it was before the OpenAI deal was announced on Jan. 23. However, there may be a silver lining to this: Microsoft’s current “AI premium” could evaporate as focus shifts back to near-term headwinds.

As I recently argued, upcoming results and guidance updates may dampen confidence in the company’s ability to re-accelerate growth starting in 2024, even if recent A.I. monetization efforts drive growth for Bing this year. If this happens, Microsoft shares could cough back all of their latest gains — and then some.

Bottom Line

There is plenty of substance to go along with the AI hype that has surrounded Microsoft lately.

The company may be poised to generate billions in additional revenue, and perhaps eventually, billions in additional earnings, from its revamped Bing platform. Dan Ives may be correct that this could add $20 per share to MSFT’s valuation.

However, in the months ahead, this may fail to result in higher share prices. Instead, shares, already moving lower, may be at risk of a further pullback in the near term. That’s bad news for anyone who bought in at the height of AI mania earlier this month.

But if you’ve yet to enter a position, this may work to your advantage. Given the high chance the AI premium evaporates before this catalyst starts to move the needle, consider taking a “wait and see” approach with MSFT stock.

On the date of publication, Thomas Niel 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.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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