Intensifying AI model competition is actually a positive! Morgan Stanley sees three major advantages for Microsoft Corporation (MSFT.US) and maintains a $600 price target.

Title context: Intensifying AI model competition is actually a positive! Morgan Stanley sees three major advantages for Microsoft Corporation (MSFT.US) and maintains a $600 price target. Text: As open-weight artificial intelligence (AI) models accelerate in adoption, enterprises have more model choices when deploying AI applications, and market competition is gradually shifting from a performance contest among single large models to multiple layers including infrastructure, data management, model orchestration, and enterprise applications. Morgan Stanley believes this trend will not weaken Microsoft Corporation's (MSFT.US) competitive advantage, but may instead further consolidate its leading position in the enterprise AI market. In its latest research report published on October 26, Morgan Stanley noted that Microsoft Corporation, with its Azure cloud computing platform, the Foundry and Fabric enterprise AI platforms, and the vast enterprise customer network built by Microsoft 365 and Copilot, is poised to become a major beneficiary of the multi-model AI era. The firm maintained its "Overweight" rating and $600 price target on Microsoft Corporation, believing the market still underestimates Microsoft Corporation's long-term growth potential across the AI value chain. The report noted that as enterprises increasingly choose different AI models based on factors such as cost, performance, response speed, and data sovereignty, the competitive advantage of a single model may gradually diminish, while the strategic value of infrastructure and application platforms capable of supporting multiple models simultaneously will further increase. Morgan Stanley believes Microsoft Corporation has three key advantages that enable it to continue expanding its AI business scale through this transition. First, the growing diversity of AI model choices will further enhance the strategic value of the Azure and Foundry platforms. According to OpenRouter data cited in the report, among the top 50 models by usage on the platform, open-weight models now account for about 72% of token usage, compared with only about 22% a year earlier. Meanwhile, since early 2026, the number of Microsoft Corporation customers building applications using products from multiple model providers has grown fivefold, indicating that the trend toward multi-model architectures among enterprises is accelerating. Morgan Stanley noted that as more frontier models, open-weight models, and small models enter the market, enterprises no longer need to hand all AI tasks to a single vendor, but can dynamically select the most suitable model based on the actual needs of different workloads. This means model selection will gradually shift from a one-time technical decision to an ongoing process of cost and performance optimization. Against this backdrop, the value of Microsoft Corporation's Azure AI Foundry will become more prominent. Currently, the Foundry platform supports more than 11,000 AI models, providing enterprises with a unified environment for model access, management, evaluation, and deployment. At the same time, regardless of which vendor's model an enterprise ultimately chooses, the related workloads can still run on Azure cloud infrastructure. Morgan Stanley believes this architecture, which does not depend on a single model provider, allows Microsoft Corporation to remain relatively neutral amid competition among different AI models and to continue benefiting from growth in enterprise AI usage by providing infrastructure and model management services. Second, Microsoft 365 and Copilot constitute an enterprise distribution advantage that is difficult for Microsoft Corporation to replicate. The report noted that as AI inference costs decline, more high-frequency, low-value routine work tasks will become economically viable to automate, and Microsoft Corporation has already embedded itself in enterprises' core workflows for productivity, collaboration, communications, and knowledge management through Microsoft 365 and Copilot. Unlike standalone AI applications that require enterprises to make additional purchases and deployments, Microsoft Corporation can directly introduce AI assistants and intelligent agents into the office environments customers use daily through its existing software products. This distribution advantage not only helps lower the barrier for enterprises to adopt AI, but is also expected to drive rapid adoption of AI features across its vast existing customer base. Currently, paid seats for Microsoft 365 Copilot have exceeded 30 million. Morgan Stanley's latest chief information officer (CIO) survey shows that 47% of surveyed CIOs prefer Microsoft Corporation for building customized AI applications, while those choosing Amazon.com, Inc. AWS and Alphabet Inc. Class C were each 10%. The firm believes this gap reflects Microsoft Corporation's significant customer relationship and distribution channel advantages in the enterprise AI application market. In addition, Microsoft Corporation's enterprise AI business has begun to form a mutually reinforcing growth loop. Currently, the number of customers using both Fabric and Foundry has exceeded 17,000, up 60% year over year. In this system, Fabric integrates enterprise data and provides business context, Foundry selects and orchestrates the AI models suitable for different tasks, and Microsoft 365 and Copilot bring AI capabilities directly into employees' daily workflows. As enterprises deploy more AI applications, related activity in turn drives growth in Azure infrastructure usage, forming a continuous growth loop from data and models to applications and cloud computing resource consumption. Morgan Stanley believes this layout, spanning multiple layers of the AI technology stack, is an important advantage that distinguishes Microsoft Corporation from single-model providers or standalone AI application developers. Third, declining AI inference costs are expected to accelerate the development of Microsoft Corporation's usage-based charging business model. As the performance of open-weight models continues to improve and the cost of running models continues to fall, the economic barrier for enterprises to deploy AI agents is also lowering. Although lower inference costs may reduce revenue per AI call, Morgan Stanley believes lower prices will stimulate enterprises to expand the scope of AI usage and significantly increase overall call volume. The report cited the "Jevons Paradox," noting that when the efficiency of using a technology improves and unit costs fall, its overall consumption may instead increase. This logic is particularly important for the AI business model transition Microsoft Corporation is pursuing. Currently, Microsoft Corporation is gradually expanding usage-based charging mechanisms in its AI products. For example, Copilot Studio uses Copilot Credits to bill based on enterprises' actual use of intelligent agents. Morgan Stanley believes that as AI agents can perform more high-frequency tasks at lower cost, enterprise usage is expected to increase significantly, thereby driving growth in Microsoft Corporation's related revenue. At the same time, Microsoft Corporation can also use its multi-model architecture to allocate workloads to the most suitable models based on the cost and performance requirements of different tasks, further optimizing the operating costs of AI services. Therefore, lower inference costs do not necessarily mean pressure on the profitability of Microsoft Corporation's AI business, but may instead create opportunities for revenue growth and improved unit economics by expanding usage scale and improving resource allocation efficiency. Morgan Stanley emphasized that as foundation models gradually become cheaper and substitutability among different models increases, the focus of competition in the AI industry may shift from the models themselves to the infrastructure, enterprise data, model orchestration, distribution channels, and application ecosystems built around them. In this process, Microsoft Corporation does not need to bet on which AI model will ultimately win. Regardless of which model enterprises choose, Azure has an opportunity to capture related infrastructure demand, Foundry can provide model management and orchestration services, Fabric handles enterprise data integration, and Microsoft 365 and Copilot can translate AI capabilities into actual enterprise applications and commercial revenue. On valuation, Morgan Stanley believes Microsoft Corporation's current share price does not yet fully reflect the long-term growth potential of its AI business. Based on the October 23 closing price of $524.51, Microsoft Corporation trades at about 27 times forward 12-month earnings, below its historical level of about 28 to 29 times. More importantly, Microsoft Corporation's current PEG ratioprice-to-earnings relative to expected earnings growthis about 1.3 times, compared with a historical level of about 2 times. Morgan Stanley believes that given the long-term earnings potential from Azure growth, Copilot commercialization, and increased AI service usage, Microsoft Corporation's current valuation remains attractive. Under the firm's base-case forecast, Microsoft Corporation's earnings per share could reach $24.08 in fiscal 2028, corresponding to about 25 times earnings and supporting the $600 price target. In a more optimistic scenario, if Azure growth accelerates further, enterprises adopt higher-priced Microsoft 365 products, and adoption of Copilot and Azure AI services exceeds expectations, Microsoft Corporation's fiscal 2028 earnings per share could reach $27.64, corresponding to a bull-case valuation of $795. However, Morgan Stanley also noted that if macroeconomic weakness causes enterprise IT spending to slow, or if AI application adoption is slower than expected, Microsoft Corporation's revenue growth CKH HOLDINGS profitability could be affected. In addition, continued increases in AI infrastructure investment could also pressure margins. The firm expects Microsoft Corporation's Azure and other cloud services revenue to grow 44.9% in fiscal 2027 and 43.2% in fiscal 2028; Microsoft 365 Commercial Cloud revenue is expected to grow 16.3% and 17.2%, respectively, over the same periods.