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On Monday, Piper Sandler provided insights into the Cloud Applications & Analytics sector, identifying new developments that could fuel a significant rise in artificial intelligence applications. Analysts at Piper Sandler emphasized two major industry shifts as potential catalysts for what they term "the next major wave in AI." The first is a tenfold increase in GPU capacity, with NVIDIA (NASDAQ:NVDA)’s data center revenue soaring to $36 billion in the last quarter, compared to $3.6 billion in early 2023. The second is the emergence of new model innovations from Alibaba (NYSE:BABA) with its Qwen QwQ model and DeepSeek, which have collectively led to a 35-fold reduction in inference costs for intelligent models.
Despite the positive outlook for AI applications, the analysts noted that execution risks for the software sector have risen due to increasing tariff, policy, and macroeconomic headwinds. The software sector’s performance, as indicated by the IGV index, has seen a one-month decline of 12%, compared to a 5% decline in the S&P 500. This suggests that confidence in the software spending demand fundamentals is waning.
However, in the long term, Piper Sandler remains optimistic about the potential for AI monetization. The firm highlighted the success of several AI applications, including Microsoft (NASDAQ:MSFT) Copilot nearing a $1 billion run rate, Salesforce (NYSE:CRM)’s Data + Agentforce AI at a $0.9 billion run rate, HubSpot (NYSE:HUBS) handling 35% of support tickets with Agentic AI, ServiceNow (NYSE:NOW)’s over 1,000 customers purchasing GenAI Pro+ SKU, and Snowflake (NYSE:SNOW)’s Snowpark, which has seen more than 100% year-over-year growth and now accounts for 3% of sales.
Looking ahead, Piper Sandler has identified its top stock picks for 2025, which include CRM (Salesforce), MSFT (Microsoft), and SNOW (Snowflake). These companies are poised to benefit from the broader proliferation of AI applications, driven by the increased GPU capacity and reduced costs of model inference. Jeffries, another research firm, has put forth its own recommendations, listing ADSK (Autodesk (NASDAQ:ADSK)), SNPS (Synopsys (NASDAQ:SNPS)), and TYL (Tyler Technologies (NYSE:TYL)) as its top choices for the same period.
In other recent news, Microsoft has reported significant developments in its artificial intelligence endeavors, aiming to achieve AI self-sufficiency. Mustafa Suleyman, head of Microsoft’s AI unit, has been working on reducing the company’s reliance on OpenAI by developing new models internally. These models, referred to as MAI, have shown promising performance in internal tests and are expected to be released as an API later this year. Meanwhile, Microsoft has revealed to shareholders that it is generating over $13 billion in annualized AI revenue, with a substantial portion coming from Azure and AI-powered Office 365 products.
In a separate development, UBS analyst Karl Kierstead has reiterated a Buy rating for Microsoft, setting a price target of $510. Kierstead highlighted a recent slowdown in Azure’s growth, attributed to go-to-market changes, but expressed confidence in Azure’s medium-term prospects. On the other hand, Stifel analysts have adjusted their price target for Microsoft to $475, maintaining a Buy rating. They emphasized Microsoft’s significant capital expenditures, expected to exceed $87 billion for fiscal year 2025, and the impressive growth of Azure’s generative AI revenue.
Additionally, Microsoft’s AI unit is focusing on long-term self-sufficiency, with efforts to develop and integrate competitive AI models. The company is also testing models from OpenAI’s competitors to power its Copilot suite of AI tools. These developments reflect Microsoft’s strategic focus on expanding its AI capabilities and addressing investor concerns regarding Azure’s growth trajectory.
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