Yahoo Finance Microsoft Is Embracing an AI Revolution
Microsoft Corp. (NASDAQ:MSFT) is making bold moves in tech, revolutionizing artificial intellligence and cloud computing.
At its recent developer event, it unveiled groundbreaking products, notably Azure Maia, and forged key collaborations, setting the stage to outpace Amazon Web Services with a 25% cloud market share.
Additionally, the strategic acquisition of Activision Blizzard catapults the company into the $100 billion mobile gaming arena.
This tech titan is not just innovating; it is reshaping the landscape of AI, cloud services and gaming, promising an exciting trajectory of growth and industry dominance.
Microsoft's bet to become AI powerhouse is pushing it to become a leader in the cloud
In November, Microsoft showcased a rich spectrum of innovative products and services during its annual developer event, underscoring a heightened pace of innovation throughout its comprehensive technology stack. The event demonstrated notable advancements in areas linked to Azure, the company's cloud infrastructure offering.
These innovative additions are expected to sustain the recent trend of closing the market share gap with Amazon's (NASDAQ:AMZN) web services unit by providing superior bundled services with AI applications, particularly with the augmented funding for developing new generative AI products. As of the third quarter of 2023, Microsoft held nearly 25% market share in the cloud market, gradually catching up with Amazon.
Source: TechCrunch
Microsoft's standout addition among the new products and services is its AI chip. This chip is crucial in providing clients with an advanced cloud infrastructure to test and execute their AI workloads. Strategically positioned, this move responds to the supply challenges presented by Nvidia (NASDAQ:NVDA), a key player in the chip industry.
The AI chip comes in different forms. First, Azure Maia is an AI accelerator chip tailored for the cloud-based processing of AI workloads like OpenAI models, Bing, GitHub Copilot and ChatGPT. Concurrently, Azure Cobalt, a cloud-native chip based on Arm architecture, is slated for release in 2024, catering to general purpose workloads.
According to AI expert Ryan Robinson, Microsoft is advancing in AI and cloud technology, strengthening its position against competitors. Additionally, its infrastructure supports the development and training of complex AI systems, accelerating its application across various industries. Hence, this progress underscores the growing importance for businesses to adopt a data-driven strategy, reinforced by digital and cloud capabilities.
Additionally, Microsoft announced the general availability of Azure Boost, a system aimed at enhancing storage and networking speed by offloading these processes from host servers. The company also highlighted expanded collaborations with AMD (NASDAQ:AMD) and Nvidia, including the Nvidia AI Foundry service, supporting enterprises and startups in developing, tuning and deploying custom AI models on Microsoft Azure.
This collaborative effort leverages Nvidia's foundational models, NeMo framework, and supercomputing capabilities. Microsoft's pursuit of chip advancements aligns with its commitment to optimizing the entire technology stack, showcasing an impressive vision and pace of development.
Microsoft introduced model-as-a-Service in its model catalog, enabling developers to integrate AI models like Llama 2 into applications effortlessly without the need to manage GPU infrastructure. The preview of Azure AI Studio simplifies model building, and the Vector Search capabilities in Azure AI Search are now generally available.
These advancements position Azure as the dominant player in the cloud segment, contributing to its accelerated growth. In contrast, AWS has experienced deceleration in the recent quarter due to macroeconomic headwinds. During the third quarter of 2023, Azure's revenue grew by 29% while AWS's grew by 12%, widening the two cloud leaders' growth trajectory.
Source: Microsoft and Amazon investor relations
Gaming should not be overlooked
On Oct. 13, Microsoft completed its $69 billion acquisition of Activision Blizzard, reinforcing its commitment to spearheading the gaming industry. This strategic move enhances the company's vision for future growth. With the acquisition finalized, Microsoft is well-positioned to capitalize on numerous opportunities, expanding its presence in the gaming market that is valued at over $200 billion.
In the global gaming scene, mobile gaming leads with a significant market share, valued at $103.50 billion. Console gaming follows at $52.90 billion, while PC gaming comes in at $38.1. billion. The emerging cloud gaming market presently holds a market value of $2.30 billion.
Source: Microsoft Gaming Fact
While Microsoft holds a substantial 30% market share in the console segment, its presence in mobile gaming is limited. The cloud gaming market has not reached a size significant enough for substantial impact.
The acquisition of Activision opens opportunities for Microsoft to enter and thrive in the mobile gaming market, which is twice the size of the console market. Enhanced by Activision's blockbuster titles, the content library will significantly elevate its cloud gaming initiatives. As technology advances and latency concerns diminish, cloud gaming will significantly grow.
Microsoft's gaming revenue, standing at $15.80 billion in the trailing 12 months, is expected to receive a boost of $9 billion in the first full year following the acquisition of Activision. This anticipated additional revenue represents a 4.10% increase based on Microsoft's trailing 12-month revenue as of September.
Source: Microsoft Investor Relations and Capital IQ
Further, the integration of Activision into Microsoft is not expected to impact the combined gross margin, as both companies maintained an average gross margin of around 70% in their last reported four quarters. The company is poised to capitalize on Activision's extensive portfolio to broaden its addressable market and strengthen its competitive edge, potentially further elevating the margin.
Activision's integration into Microsoft's portfolio stands to be a pivotal catalyst for Microsoft's foray into the expansive mobile gaming sector, valued at over $100 billion. This strategic move opens up a substantial international growth avenue for Microsoft, particularly in regions with a relatively modest presence.
Notably, King, Activision's mobile game studio, currently ranks as the third-largest publicly listed developer, trailing only Tencent (TCEHY) and NetEase (NASDAQ:NTES). With popular titles like Candy Crush in its arsenal, King's offerings could propel Microsoft to a more significant mobile gaming market share. Furthermore, this expansion into the mobile gaming realm has the potential to bolster its advertising business, providing valuable data and increasing its presence across mobile, Windows and search platforms.
Moreover, Activision's rich content library, boasting renowned titles like Call of Duty, World of Warcraft and Diablo, stands as a key driver, enticing players to explore Microsoft's cloud gaming service, which is still in its early phases. The increased adoption of this service would also translate to a growth in Game Pass subscriptions, which have already surpassed 33 million subscribers.
Source: Statista and Recent News
Microsoft is the second-largest cloud infrastructure provider, providing a distinct advantage over its competitors in the video game industry. While Amazon, with its dominant share in cloud infrastructure, could potentially enter the market, regulatory hurdles may hinder its acquisition of a major video game operator. This regulatory landscape imparts a structural advantage to Microsoft. Latency issues have impeded the widespread adoption of cloud gaming, a challenge expected to see resolution in the coming years, further shaping the industry's landscape.
Soaring AI investments reflected in premium valuation
Microsoft is intensifying its investment in AI to assert dominance, with a noticeable increase in capital expenditures. In the first quarter of fiscal 2024, capital expenditures surged 69.70% year over year to $11.20 billion, signaling a sustained emphasis on solidifying the company's presence in AI.
Despite this heightened capex cycle, Microsoft maintains robust free cash flow, reaching $20.7 billion in the first quarter, marking a 22.50% year-over-year increase. While Microsoft's dividend per share experienced gradual growth, share buybacks have slowed in recent quarters.
Meanwhile, Microsoft's valuation multiples indicate the stock trades at a premium. However, this premium is justified considering the company's aggressive expansion to dominate the AI space, successful efforts to establish itself as a mega vendor in the cloud platform, the competitive edge gained through bundled services and its ambitious vision to lead the rapidly growing gaming market.
The company sits where its business is going in all the right directions and making all the right moves, and the market is giving it the premium for the right reasons.
Source: Compilation of data from GuruFocus
Takeaway
Microsoft is strategically positioning itself as a leader in AI and the cloud market, demonstrating this ambition with innovative products like Azure Maia and significant advancements in AI and cloud infrastructure. Its recent acquisition of Activision Blizzard, a major move into the mobile gaming industry, aligns with this strategy.
This bold expansion, coupled with increasing investments in AI and strong financial performance, highlights Microsoft's aggressive growth trajectory. By diversifying its portfolio and enhancing its cloud capabilities, Microsoft is not only challenging major competitors like AWS, but also reshaping its role in the tech world.
This positions Microsoft as a powerhouse in both technology and gaming, backed by a strong market valuation that reflects its potential for future growth and dominance.
This article first appeared on GuruFocus.
