What a difference a calendar year makes. Across 2022, Microsoft (MSFT 1.92%) shares lost nearly 30% of their value based on concerns that supply shortages would hamstring tech companies of all shapes and sizes. So far, 2023 has been a much different story, with the stock rising roughly 40% year to date.
One of the key reasons -- if not the key reason -- is the company's deep and direct involvement in artificial intelligence (AI).
The force of the future
NASDAQ: MSFT
Key Data Points
The most prominent spear in Microsoft's AI arsenal is OpenAI, the developer behind the highly popular ChatGPT app. While OpenAI is not a Microsoft property and operates as an independent entity, the tech giant is a major investor. Microsoft followed up a $1 billion investment in 2019 with subsequent outlays in 2021 and earlier this year.
As per the two companies' deal, OpenAI operates exclusively on its partner's Azure cloud computing platform, and its solutions (like ChatGPT) have been and will continue to be deployed across a range of Microsoft products. The latter company has already rolled out a new ChatGPT-enhanced version of its Bing search engine and the Azure OpenAI service for the cloud service's clients.
Adoption of its product has, unsurprisingly, been brisk; Microsoft recently reported that at the end of its fiscal third quarter of 2023, Azure OpenAI had over 2,500 customers. That was 10 times the figure only one quarter prior. Daily installs of the Bing app, meanwhile, have risen at a four-fold rate since the ChatGPT-powered version was launched.
Bing has always been far behind the consistent leader in search, Alphabet's foundational Google. If sustainable, that growth in installs could push its market share higher to the point that, perhaps, Bing could close the gap meaningfully or even (perish the thought) come within striking distance of Google.
Microsoft has had its stumbles over the years -- remember the Zune line of iPod-wannabe music players the company was selling for years? Yeah, I didn't think so. For the most part, though, it has done a decent job identifying future trends and consumer needs (exhibit A: Azure).
It has had a similarly long-view eye on AI. In 2019, before most of us had ever heard of OpenAI or taken ChatGPT for a what-the-heck test drive, Microsoft waxed enthusiastic about the technology.
In a blog post trumpeting the original OpenAI investment, the company quoted its CEO Satya Nadella as saying, "AI is one of the most transformative technologies of our time and has the potential to help solve many of our world's most pressing challenges."
Microsoft is not the Red Cross or Habitat for Humanity. Of course, its real goal is to make piles of money by being a leading AI player, not to improve the lot of humankind for free. Such lofty language gives away the game, though; the tech incumbent has sky-high ambitions for ChatGPT and whatever future AI technologies its partner can devise and hook into Microsoft services.
Microsoft's river of revenue
Another reason Microsoft is so forward-looking is that the rear view isn't necessarily appealing. The company's more personal computing segment, which includes Windows original equipment manufacturer (OEM) sales and devices such as the Xbox game console, saw a 9% year-over-year decline in the most recently reported quarter. That was driven by declines in revenue for devices (such as the Xbox) and Windows OEM sales; both subcategories fell by around 30%.
These drops were particularly conspicuous in light of the company's other business lines that, for the most part, continued to grow robustly. Meanwhile, overall revenue and profitability growth was not only encouraging, but the headline numbers also beat the average analyst estimates.
From all this, we can draw two conclusions: (1) Microsoft is still doing well enough to keep pouring resources into hot new tech like AI, and (2) it has a few drags on its performance, sufficient to inspire new(ish) products or service lines. Since Microsoft is smartly positioning AI as the technology that helps draw more revenue from existing products, it can be an important growth driver sooner than later.
Fast and furious
I say that because AI adoption is occurring faster than ChatGPT can write you a two-page essay on Abraham Lincoln. To cite one of many bullish estimates, Next Move Strategy Consulting forecasts the AI market will rise at a more than 12-fold pace from now until 2030, with an estimated value of $142 billion rocketing to over $1.8 trillion in the latter year.
By that point, smart Microsoft, with its expanding suite of AI-enhanced apps and services, should be well entrenched and filling huge buckets with this money gusher. The future of AI technology is bright, and if Microsoft keeps up its present pace of investment and encouragement, its prospects look positively golden.
