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Microsoft is poised to join Apple in the prestigious club of companies with a market capitalization surpassing $3 trillion. This upward trajectory is driven by generative artificial intelligence (AI) advancements.

According to analysts at Morgan Stanley, who have set a new price target of $415 for Microsoft, the company could achieve a valuation of approximately $3.1 trillion.

The optimism surrounding Microsoft extends beyond Morgan Stanley, with news that 52 analysts rate the stock as a buy or equivalent.

What is generative AI?

Generative AI, a branch of AI that utilizes deep-learning models to generate high-quality text, images, and other content based on training data, plays a pivotal role in Microsoft's potential sudden rise.

Generative AI has developed at light speed with the release of OpenAI's ChatGPT as a notable milestone.

Powered by a large language model, ChatGPT is capable of producing poems, jokes, and essays that resemble human creations. Moreover, generative models can learn the grammar of software code, molecules, natural images, and various other types of data.

Customers can leverage generative models to accelerate software code development, discover new molecules, and build conversational chatbots tailored to enterprise data.

Additionally, generative AI has the potential to create synthetic data, which can be used in lieu of real data to enhance AI models while adhering to privacy and copyright laws.

Morgan Stanley's Keith Weiss named Microsoft as the top pick among large-cap software companies, emphasizing the company's favorable position to capitalize on the growth of AI. Generative AI, in particular, presents Microsoft with opportunities to automate a wider range of business processes through software.

The market's enthusiasm for all things AI-related has played a significant role in driving stock prices up for technology companies involved in AI.

Microsoft's backing of startup OpenAI, known for the viral success of its ChatGPT tool, has fueled much of the excitement. The company is now aiming to incorporate OpenAI technology into its entire suite of Office apps, including Excel, PowerPoint, Outlook, and Word.

Despite a substantial 42% surge in share price this year, Weiss believes that Microsoft's valuation remains reasonable. He highlights that the stock's price-earnings multiple divided by the expected earnings growth (PEG ratio) is in line with historical averages, despite Microsoft's unrivaled positioning in generative AI. The PEG ratio is a commonly used metric among growth-focused investors.