April 14, 2024
Microsoft is embracing the AI ​​revolution

Microsoft Corp. (NASDAQ:MSFT) is making bold moves in technology, revolutionizing artificial intelligence and cloud computing.

At its recent developer event, it unveiled groundbreaking products, notably Azure Maia, and forged major collaborations, creating the platform to overtake Amazon Web Services with 25% cloud market share.

Additionally, the strategic acquisition of Activision Blizzard propels the company into the $100 billion mobile gaming sector.

This tech titan isn’t 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 an AI powerhouse is leading 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 the increasing pace of innovation across its broader technology stack. The event demonstrated significant advancements in areas related to the company’s cloud infrastructure offering, Azure.

These innovative additions are expected to maintain the recent trend of narrowing the market share gap with Amazon’s (NASDAQ:AMZN) Web Services unit by providing better bundled services with AI applications, especially developing new generic AI products. With increased funding to do. By the third quarter of 2023, Microsoft had about 25% market share in the cloud market, gradually catching up with Amazon.

Microsoft is embracing the AI ​​revolutionMicrosoft is embracing the AI ​​revolution

Microsoft is embracing the AI ​​revolution

Source: techcrunch

Microsoft’s most notable contribution to new products and services is its AI chip. This chip is critical in providing customers with advanced cloud infrastructure to test and execute their AI workloads. Strategically positioned, the move responds to supply challenges presented by Nvidia (NASDAQ:NVDA), a major player in the chip industry.

AI chips come in different forms. First, Azure Maia is an AI accelerator chip designed for 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 scheduled for release in 2024 to address general purpose workloads.

According to AI expert Ryan Robinson, Microsoft is moving forward in AI and cloud technology, thereby strengthening its position against competitors. Additionally, its infrastructure supports the development and training of complex AI systems, accelerating its application across various industries. Therefore, this progress underlines the increasing 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 that aims to increase storage and networking speeds by offloading these processes from the host server. The company also highlighted expanded collaboration 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 is consistent with its commitment to optimizing the entire technology stack, demonstrating an impressive vision and pace of development.

Microsoft introduced Models-as-a-Service to its model catalog, enabling developers to easily integrate AI models like Llama2 into applications without the need to manage GPU infrastructure. The preview of Azure AI Studio simplifies model creation, and vector search capabilities in Azure AI Search are now generally available.

These advancements establish Azure as a major player in the cloud segment, contributing to its accelerated growth. In contrast, AWS has experienced a slowdown in recent quarters due to macroeconomic headwinds. During the third quarter of 2023, Azure’s revenue increased by 29%, while AWS’s revenue increased by 12%, extending the growth trajectory of both cloud leaders.

Microsoft is embracing the AI ​​revolutionMicrosoft is embracing the AI ​​revolution

Microsoft is embracing the AI ​​revolution

Source: Microsoft And Amazon Investor Relations

Gaming should not be ignored

On October 13, Microsoft completed its $69 billion acquisition of Activision Blizzard, solidifying its commitment to leading the gaming industry. This strategic move enhances the company’s outlook for future growth. With the acquisition finalized, Microsoft is well-positioned to take advantage of numerous opportunities, expanding its presence in a gaming market worth over $200 billion.

In the global gaming landscape, mobile gaming is the leader with a significant market share, valued at $103.50 billion. Console gaming comes in at $52.90 billion, while PC gaming comes in at $38.1. Arab. The emerging cloud gaming market currently has a market cap of $2.30 billion.

Microsoft is embracing the AI ​​revolutionMicrosoft is embracing the AI ​​revolution

Microsoft is embracing the AI ​​revolution

Source: Microsoft Gaming Facts

While Microsoft has 30% market share in the console segment, its presence in mobile gaming is limited. The cloud gaming market has not reached a sufficient size to have a significant impact.

The acquisition of Activision opens up opportunities for Microsoft to enter and thrive in the mobile gaming market, which is twice the size of the console market. Augmented by Activision’s blockbuster titles, the content library will significantly enhance its cloud gaming initiatives. As technology advances and latency concerns decrease, cloud gaming will grow significantly.

Microsoft’s gaming revenue in the last 12 months was $15.80 billion, which is expected to increase to $9 billion in the first full year following the Activision acquisition. This anticipated additional revenue represents an increase of 4.10% based on Microsoft’s last 12 months of revenue through September.

Microsoft is embracing the AI ​​revolutionMicrosoft is embracing the AI ​​revolution

Microsoft is embracing the AI ​​revolution

Source: Microsoft Investor Relations and Capital IQ

Additionally, the integration of Activision into Microsoft is not expected to impact combined gross margins, as both companies have maintained an average gross margin of approximately 70% over their last four quarters. The company is poised to leverage Activision’s broader portfolio to expand its target market and strengthen its competitive edge, potentially driving further margin growth.

The integration of Activision into Microsoft’s portfolio has proven to be a significant catalyst for Microsoft’s entry into the vast mobile gaming sector valued at over $100 billion. This strategic move opens the way for substantial international growth for Microsoft, especially in areas 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 offering could propel Microsoft to more significant mobile gaming market share. Additionally, this expansion into the mobile gaming sector has the potential to boost its advertising business, provide valuable data, and increase its presence on mobile, Windows and search platforms.

Additionally, Activision’s rich content library, which includes well-known titles like Call of Duty, World of Warcraft, and Diablo, stands as a major driver enticing players to explore Microsoft’s cloud gaming service, Which is still in its initial stage. The adoption of this service will also increase Game Pass subscription, which has already crossed 33 million subscribers.

Microsoft is embracing the AI ​​revolutionMicrosoft is embracing the AI ​​revolution

Microsoft is embracing the AI ​​revolution

Source: Statista and recent news

Microsoft is the second largest cloud infrastructure provider, which offers a distinct advantage over its competitors in the video game industry. While Amazon, with its dominant stake in cloud infrastructure, could potentially enter the market, regulatory hurdles could hinder the acquisition of a major video game operator. This regulatory landscape provides Microsoft with a structural advantage. Latency issues have hindered the widespread adoption of cloud gaming, this challenge is expected to be resolved in the coming years, further shaping the industry landscape.

Growing AI investments are reflected in premium valuations

With a significant increase in capital expenditure, Microsoft is accelerating its investments in AI to maintain dominance. In Q1FY24, capital expenditure increased 69.70% year over year to $11.20 billion, indicating a continued emphasis on strengthening the company’s presence in AI.

Despite this increased capital expenditure cycle, Microsoft has maintained strong free cash flow, which reached $20.7 billion in the first quarter, representing an increase of 22.50% year-over-year. While Microsoft’s dividend per share has seen sequential growth, share buybacks have slowed in recent quarters.

Meanwhile, Microsoft’s valuation multiples indicate that the stock is trading at a premium. However, the company’s aggressive expansion to dominate the AI ​​space, its successful efforts to establish itself as a mega vendor in cloud platforms, the competitive edge gained through bundled services, and its ability to lead the rapidly growing gaming market This premium is justified given the ambitious vision.

The company sits where its business is going in all the right directions and making all the right steps, and the market is paying a premium to it for the right reasons.

Microsoft is embracing the AI ​​revolutionMicrosoft is embracing the AI ​​revolution

Microsoft is embracing the AI ​​revolution

Source: Compilation of data from GuruFocus

take away

Microsoft is strategically positioning itself as a leader in the AI ​​and cloud market, demonstrating this ambition with innovative products like Azure Maia and significant advancements in AI and cloud infrastructure. The recent acquisition of Activision Blizzard, a major step forward in the mobile gaming industry, is in line 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 establishes Microsoft as a powerhouse in both technology and gaming, backed by a strong market valuation that shows its potential for growth and dominance in the future.

This article first appeared on GuruFocus.

Source: finance.yahoo.com

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