Microsoft - Fundamental Analysis: Everything you need to know.

20 may 2023

Microsoft's Stock Rises on the Back of AI Expansion, Gaming Dominance, and Positive Analyst Outlook

Over the past few months, Microsoft's stock has experienced a remarkable surge of almost 30%, driven by the company's ambitious venture into the field of artificial intelligence (AI). This cutting-edge technology has the potential to revolutionize numerous industries in the years ahead, and Wall Street has taken notice, leading to a bullish outlook on Microsoft's stock. While Microsoft already boasts established brands like Office, Windows, Azure, and Xbox, the growing influence of AI has further enhanced its potential, making it an opportune time to explore the opportunities presented by this tech giant. Here are three crucial factors that knowledgeable investors should consider.

AI Potential:
In 2019, Microsoft made a strategic investment of $1 billion in OpenAI, a move that has proven to be a significant win for the company. OpenAI's advanced chatbot, ChatGPT, has triggered an AI race among tech giants and prompted Microsoft to invest an additional $10 billion in the company. This partnership has positioned Microsoft as a frontrunner in the market, allowing the integration of OpenAI's technology into its own services such as Office, Azure, and Bing. As a result, Microsoft has solidified its position as the leading provider of AI services for both consumers and businesses.
Furthermore, Microsoft's cloud computing platform, Azure, has the potential to become a market leader with the help of AI. Richard Bernstein, an investment manager, predicts that Microsoft's cloud revenue could more than double as the company expands its AI offerings. As of the first quarter of 2023, Azure currently holds the second-largest market share in the cloud industry at 23%, with Amazon Web Services leading at 32%. However, Microsoft's leadership in artificial intelligence gives it the potential to surpass its competitors in the coming years.

Growing Dominance in Gaming:
In addition to making strides in AI and cloud computing, Microsoft has made significant progress in the gaming industry. The Xbox brand has propelled the company to become the fourth-largest games company globally, trailing only Tencent, Sony, and Apple. However, Microsoft is actively taking steps to increase its market share in this sector.
One of Microsoft's notable achievements in gaming is the introduction of the Xbox Game Pass, a game subscription service that has transformed how millions of gamers consume games since its launch in 2017. By offering users access to an extensive collection of games for a low monthly fee, Game Pass eliminates the need to purchase games individually. Moreover, Microsoft adds its own game titles to the platform on their launch day, which is a significant selling point. With the acquisition of more game studios, Game Pass has become increasingly attractive to gamers, offering hit titles and value-added features that make the Xbox console more appealing than competitors like Sony's PlayStation 5.

Despite facing macroeconomic challenges, Microsoft's games business has continued to grow, thanks to the success of Xbox Game Pass. In the third quarter of 2023 (ending March 2023), revenue from the service increased by 3% year-on-year, and the number of Game Pass members grew by an impressive 150% from 2020 to 2022.

Analysts' Optimism:
Investors have been drawn to Microsoft this year due to the company's expansion into AI, resulting in the stock price rising nearly 30% since the beginning of 2023. Microsoft's strong brands, such as Office, Windows, Azure, and Xbox, have already made it an appealing investment. However, the company's foray into AI has further boosted its outlook. Savvy investors recognize that Microsoft possesses significant potential in AI and is leveraging its partnership with OpenAI to integrate the startup's technology across various services, including Office, Azure, and Bing. Additionally, Microsoft has made notable progress in gaming, with the rapid growth of its subscription service, Xbox Game Pass, which adds value to the Xbox console.

Analysts have expressed optimism about Microsoft's prospects, giving the company a buy/strong buy rating. They recognize the significant potential of Microsoft's expanding role in AI, the cloud market, and gaming. The average 12-month price target reflects a projected 7% growth in the stock. With its strong foothold in established industries and its investments in emerging technologies, Microsoft is seen as a long-term buy with substantial growth potential.

In summary, Microsoft's stock has experienced a substantial rise driven by its expanding ventures into AI, its dominance in the gaming industry through Xbox Game Pass, and the positive outlook from analysts. The company's strategic partnership with OpenAI and its integration of AI technology into various services position it as a leading provider in the AI market. Furthermore, Microsoft's cloud computing platform, Azure, has the potential to become a market leader. As Microsoft continues to innovate and expand its offerings, investors recognize the long-term growth opportunities it presents.