Investors are receiving clearer indications from Microsoft regarding its capacity to convert AI spending into earnings, according to Goldman Sachs analyst Gabriela Borges. According to Borges, the quality of Microsoft's AI models is getting better, and the growing user base is contributing to a "positive feedback loop."
The surge reflects growing confidence that Microsoft's substantial AI spending, which had previously worried some investors due to unclear returns, is beginning to bear fruit. The company's deep integration of AI into its Office suite and Azure cloud services, combined with rapid growth in paid Copilot seats, signals strong enterprise adoption that was not fully priced in.
"You're seeing more breadcrumbs around Microsoft's ability to pull varying levers on the monetization side that were perhaps not nearly as obvious as before," Borges said in a Bloomberg Television interview.
The market reacted fast. Shares jumped 17% to $457 by 1:35 p.m. in New York on Thursday, marking the largest single-day gain since October 2008.
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One reason Microsoft had been in a tough spot: investors kept comparing it to Google.
The worry was that Alphabet, Google's parent company, had a big lead in AI. About 90% of Fortune 100 firms are using Google's Gemini Enterprise.
Borges said Microsoft had been stuck in a "penalty box for a number of quarters" where market participants tended to assume that Google held the advantage. Over the past six to 12 months, a common pessimistic argument about the stock was that Copilot fell short of its potential, she noted, but product quality is improving.
Borges described the current adoption phase as "a lot of spaghetti at the wall in order to find good product market fit." She also noted "pretty significant improvement behind the scenes" for Microsoft.
Borges predicts that over the coming year, evidence will show that the AI gap "is not as bad as people think it is."
The catch: However, Borges noted that widespread Copilot use is still in an early, trial period. She indicated her belief that practical applications will develop over time.
She pointed to her own firm as an example. "I have no doubt we will be in a position six months from now, a year from now - even as I reflect back on our own experience at Goldman Sachs over the last 12 months - the progress that we've made with being able to see how these tools can actually help in our day-to-day," Borges said.
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