AI updates from Microsoft are the 'tip of the iceberg' of the tech giant's capabilities and the stock can drive up another 16%, says Jefferies

• Microsoft stock could jump as its adds AI features to its Bing and Edge search products, Jefferies said.
• The firm raised its price target for the tech giant to $310 from $275 a share and reiterated its buy rating.

Microsoft's overhaul of its search engines to incorporate AI chatbot features - in a race set off by ChatGPT - will provide a long-term lift for its stock, Jefferies said in driving up its price target on the Silicon Valley stalwart.

Microsoft unveiled its "new Bing" on Tuesday that was created with OpenAI, the company behind the popular ChatGPT tool. Microsoft said its chat extension that can help users with tasks such as planning trips and shopping. Microsoft said its Edge web browser will have a chat feature allowing users to ask questions.

Jefferies in a note released Wednesday raised its 12-month price target to $310 from $275 per share, indicating it expects Microsoft shares to rise 16% from Tuesday's close at $267.56. Microsoft shares rose 3% during Wednesday trade.

"Search improvements will act as a tailwind to ad [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," Jefferies equity analyst Brett Thill said in a note reiterating its buy rating on Microsoft.

"We view these updates as the tip of the iceberg for MSFT's AI capabilities, with the largest opportunity in enterprise use cases," said Thill.

Microsoft is "reviving Bing" as it sees a big opportunity in the digital advertising market, the analyst said. The market is valued at $570 billion in 2022 and search represents about 40% of that.

"Despite the higher cost to serve a GPT-powered answer, MSFT stated incremental margins are high. While an exciting opportunity, the move feels early innings with true revenue inflection likely on an extended timeframe," said Thill.

Microsoft recently said it would invest billions of dollars into OpenAI to integrate ChatGPT-like tools into its products including Excel, Powerpoint and search.

Jefferies said it would temper near-term revenue expectations stemming from Microsoft's product updates as it foresees an "extended monetization timeline" while the company builds the ecosystem and ramps ad spending.

The "more exciting AI opportunity lies within enterprise, unlocking potential through Power Apps, Teams, and GitHub," said Thill. Meanwhile, "we would not expect GOOGL to stand still as it is also accelerating its push to embed more AI in Google search," he said.

This week, Google introduced Bard, with CEO Sundar Pichai describing it as "an experimental conversational AI service". Bank of America said Google is ready for 'battle' in the AI-services business.

"It's a new day in search, it's a new paradigm for search," Microsoft CEO Satya Nadella said at his company's event Tuesday. Search is the "largest software category on planet Earth," he said.