Wall Street expects Microsoft (MSFT) and Palo Alto Networks (PANW) to continue to build on this year’s huge gains on the back of strong innovation — and that’s one reason we’re long-term holders of both technology names. The tech-heavy Nasdaq Composite is up 32% year-to-date, with software giant Microsoft and cybersecurity leader Palo Alto having surged 41% and 85% over the same period, respectively. The sector can thank much of its success to the excitement surrounding artificial intelligence. “I think there’s going to be tremendous amounts of efficiency and customer happiness driven from [AI] at one end,” Palo Alto Networks CEO Nikesh Arora told CNBC in May. “I think at the other end, it obviously has tremendous opportunities in the way it can drive efficiency at how companies are run.” Here’s a breakdown of two analyst calls targeting Microsoft and Palo Alto, along with our take, too. Microsoft The news: WedBush predicted that Microsoft will notch a $3 trillion market capitalization by early 2024, joining the ranks of tech giant Apple (AAPL). In a note to clients Wednesday, WedBush analysts contended that the monetization of AI should help drive Microsoft shares higher. The company has invested billions of dollars in OpenAI, the non-profit research laboratory behind viral ChatGPT, and has already integrated generative AI technology into its own offerings. “In this ‘Game of Thrones’ battle for AI market share we view the enterprise as the golden-goose opportunity, as we estimate the AI market opportunity is an $800 billion market over the next decade,” the analysts argued. WedBush has an outperform, or buy, rating on Microsoft and a price target of $375 a share. That’s a roughly 12% premium on Microsoft’s closing price Wednesday. The Club’s take: Microsoft’s cloud-computing unit, Azure, has been the main driver of the stock’s performance. Back in April, the company said its 26% to 27% Azure revenue-growth guidance for the last quarter would only include a one-percentage-point benefit from AI. So, for Microsoft stock to continue this year’s double-digit rally and march toward a $3 trillion market valuation, it will need AI adoption to scale and contribute more to revenue growth at Azure. We expect continued AI innovation at Microsoft’s cloud division and across the company, and will be watching developments closely. Palo Alto Networks The news: RBC Capital Markets on Wednesday bumped Palo Alto Networks’ price target to $277 a share, from $232. In a note to clients, analysts at the firm said they expect the company to be a key beneficiary from a consolidation in cyber-security spending. “We remain bullish on the opportunity to benefit from waves of innovation and subsequent s-curves of growth opportunities,” the analysts wrote. Others on Wall Street are optimistic, too. Morgan Stanley said last week that Palo Alto was on its way to becoming the first cybersecurity company to notch a $100 billion market valuation. The stock closed up 1.27% Wednesday, settling at nearly $258 a share. The Club’s take: RBC’s view is no different from ours. As we have said for months, Palo Alto is a leader in the cybersecurity space, benefitting from enterprises consolidating their security budgets around the company’s platform to achieve better security outcomes through efficient pricing options. Although Palo Alto is not the only beneficiary of this trend, the company has stood out for its ability to expand its operating margins significantly over the past year. While the uncertain deal environment has weighed on many information technology companies, Palo Alto should continue to benefit because cybersecurity services are a priority regardless of a company’s IT budget. That makes its shares a resilient investment in any economic environment. (Jim Cramer’s Charitable Trust is long MSFT, PANW AAPL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Privately held companies have been left to develop AI technology at breakneck speed, giving rise to systems like Microsoft-backed OpenAI’s ChatGPT and Google’s Bard.
Lionel Bonaventure | AFP | Getty Images
Wall Street expects Microsoft (MSFT) and Palo Alto Networks (PANW) to continue to build on this year’s huge gains on the back of strong innovation — and that’s one reason we’re long-term holders of both technology names.