Analysts see software heavyweight making big AI moves

The song is old, but the lyrics still ring true: You take the high road, and I'll take the low road.

Only in this case we're not talking about the bonnie, bonnie banks of Loch Lomond, but the world of big time software companies.

On the one hand, we have software kingpin Microsoft  (MSFT) - Get Free Report, which has been playing leapfrog with Apple to see who's got the biggest market cap on earth.

And on the other hand, we have graphic software company Adobe  (ADBE) - Get Free Report, which reported stronger-than-expected adjusted fourth-quarter earnings last month but also came in with a weaker-than-expected revenue outlook.

Both companies have caught the eye of BNP Paribas analyst Stefan Slowinski who featured them in a recent research note.

Like most big outfits, Microsoft and Adobe are always looking to acquire smaller players.

Microsoft went through seven kinds of M&A hell to finally complete the $75 billion acquisition of video game maker Activision Blizzard in October.

Activision deal provides boost for Microsoft

The deal had been announced on Jan. 18, 2022, but British regulators initially gave the merger a two-fingered salute and refused to sign-off on the acquisition until Microsoft made some changes to the original proposal. 

Related: Mark Zuckerberg aims to compete with ChatGPT with latest move

Adobe experienced some acquisition aggravation in Merry Olde England as well, only in this case the deal went south when the company pulled the plug on its proposed $20 billion takeover of privately held design startup Figma following pushback from regulators in Europe and the U.K.

The company unveiled the deal in September of 2022, saying it would pay cash and stock for Figma, the San Francisco platform design group used by companies such as Zoom Video  (ZM) - Get Free Report and Coinbase  (COIN) - Get Free Report.

However, Britain's Competition and Markets Authority, the same agency that gave Microsoft such a hard time, said that the deal would likely "harm innovation for software used by the vast majority of UK digital designers."

Adobe said the deal, which originally included a $1 billion breakup fee for both sides, was terminated mutually, saying there was no "clear path" to approvals from either the U.K. or the European Union.

The Figma stigma was one of the factors that prompted Slowinski to downgrade Adobe to underperform, while boosting Microsoft to outperform. 

"Microsoft got their Activision deal done," he wrote. "Adobe did not close Figma. This provides growth and self-help boosts for MSFT."

Slowinski also had some kind words for Azure, Microsoft's cloud computing platform, as he called for growth accelerating to 30% as customers look to develop AI use cases.

Adobe is focused on adoption of Generative AI, not monetization near term, the analyst said.

GenAI is an artificial intelligence capable of generating text, images, or other media, using a generative model. 

Industry leaders need GenAI strategy

It can transform the process of collecting feedback from consumers, reaching more people across more demographics than ever before, and learning more about what they really think, according to the Harvard Business Review.

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"The new wave of generative AI systems, such as ChatGPT, have the potential to transform entire industries," Boston Consulting Group said. "To be an industry leader in five years, you need a clear and compelling generative AI strategy today."

Slowinski said he thinks that while uptake for Copilot, Microsoft’s chatbot, will be slow this year, he sees Copilot driving revenue from fiscal year 2025.

He noted that Microsoft recently introduced Copilot Pro, a new premium subscription that the company said provides a “higher tier of service for AI capabilities, brings Copilot AI capabilities to Microsoft 365 Personal and Family subscribers, and new capabilities, such as the ability to create Copilot GPTs."

"We see Microsoft starting to pivot to 'GenAI returns' from 'GenAI investment' in FY’25,” the analyst said.

He also sees potential earnings beats driven by operating efficiencies and Activision restructuring, despite higher capital expenditures.

As for Adobe, Slowinski said GenAI may widen the funnel, but he was skeptical that the company will be able to capture a large share of those new users, or be able to monetize new more casual users.

"We also fear that Big Tech competitors will embed GenAI image tools into their Ad Tech offerings as they look to expand enterprise businesses," he said.

Slowinski said image generation and editing is becoming commoditized, with Big Tech looking to bundle these capabilities into other consumer and enterprise services.

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