Microsoft will need 'a crowbar to pry away' Google's advertising dominance, even with its A.I. investments

Published Wed, Feb 8 20239:16 AM ESTUpdated Wed, Feb 8 20239:42 AM EST

Microsoft 's latest artificial intelligence investments signal that the software giant is making strides in its attempt to unseat Alphabet as the dominant search and advertising provider — but analysts say it will take time to see any significant market share gains. The comments from analysts came after the Windows software and Xbox gaming maker on Tuesday announced new AI-powered updates to its Bing search engine and Edge browser, building on the ChatGPT and AI craze that's overtaken Wall Street and investors. Though early stage, many analysts view the machine learning features, and AI in general, as the next growth stage for a tech bellwether that saw shares slump about 29% in 2022 in an environment of rising interest rates and elevated inflation. But analysts aren't convinced that significant market share gains will come anytime soon. MSFT YTD mountain Microsoft shares are up 11.6% so far this year "Search improvements will act as a tailwind to [advertising revenue long term], but it will take time to bring users back to Bing and they will need a crowbar to pry away advertisers from Google," said Jefferies' analyst Brent Thill in a Tuesday note. "We view these updates as the tip of the iceberg for MSFT's AI capabilities, with the largest opportunity in enterprise use cases." Thill added that the move "feels early innings" with a revenue inflection likely years away. At the same time, he suspects the announcement will further push Google to roll out more of its own AI search engine features. UBS analyst Karl Keirstead agreed that even an upgraded Bing has a "mountain to climb" if it hopes to overtake Google. Guggenheim's John DiFucci added that investors are underestimating the fact that other tech companies will also benefit from the latest AI push. "All good technology companies should be investing in game-changing technology (AI) that can make the world more efficient – and most of them are," he wrote in a Tuesday note. To be sure, even though Microsoft accounts for just a fraction of the search advertising market, analysts see signs that the company is making significant progress. "Though just ~3% share today (MSFT disclosed $18B in 2022 advertising revs), MSFT noted it already has begun to take share (i.e., in each of last 7 qtrs) and that the incremental investments should support a long runway ahead for further gains," wrote Wells Fargo analyst Michael Turrin. According to Piper Sandler's Brent Bracelin, Microsoft AI should reach $40 billion in revenue in half the time it took the company's cloud segment to reach that milestone. He also estimates that Microsoft could expand its market share within the digital ad market by as much as 7% sometime in 2026. "The early days of AI-powered applications (including Bing) are bound to have fits and starts, but the pace of change seems faster than any other enterprise technology that we've encountered," he said in a report, also published Tuesday. Piper raised its 12-month share price target for Microsoft to $290 from $247. — CNBC's Michael Bloom contributed reporting