Since its founding nearly 50 years ago, Microsoft (MSFT 0.50%) has had monster success in tech. The software giant is the second-most valuable company in the world, with a market cap of $2.5 trillion -- only behind Apple.
Microsoft is home to some of the world's most popular brands, which has seen its annual revenue climb 68% over the last five years and operating income rise 106%. The company's vast resources have given it the funds to invest in up-and-coming markets such as artificial intelligence (AI). Microsoft was among the first to invest in the booming market, giving it a powerful position in the sector.
However, competition in AI is growing rapidly and could make it challenging for Microsoft to retain its dominance over the long term. So, before you load up on this tech giant's stock, it's smart to understand the positives and potential negatives of its business.
Bear case: Steep competition in AI
Microsoft seemingly had the foresight of the decade by investing $1 billion in ChatGPT developer OpenAI in 2019. The company has since increased that figure by $10 billion and procured exclusive licenses on several of the start-up's AI models. The partnership has given Microsoft a significant head start in the industry, using OpenAI's technology to bring AI updates to many of its services. Microsoft's solid positions in productivity software and cloud computing have helped it become one of the biggest names in AI.
However, competitors like Alphabet and Amazon used the first half of this year to make inroads in the market. Alphabet unveiled its own version of ChatGPT called Bard in February and is expanding its AI services on Google Cloud. Meanwhile, Amazon utilized its leading market share in cloud computing with Amazon Web Services (AWS) to attract customers to its expanding library of AI tools.
For now, Microsoft's biggest threat is Amazon. AWS is used by some of the world's most prominent companies, including Netflix, Sony, and Walt Disney. If the platform can continue delivering advanced AI services, it could retain its lead in the market and lock out Microsoft.
However, Microsoft's cloud revenue rose 27% year over year in its latest quarter, while Amazon's increased by 12% in the same period. The difference is encouraging as Microsoft works to pull ahead of Amazon.
Bull case: Home to some of the world's most potent brands
The key to winning in AI, or any market for that matter, appears to be to find a niche and be the best. While Microsoft is competing with Amazon and Alphabet in the cloud computing part of the industry, it has almost unrivaled dominance in productivity software. Millions of businesses and consumers worldwide rely on Microsoft Office productivity programs such as Word, Excel, PowerPoint, and Outlook on a daily basis.
As a result, gradually adding AI features to each platform could make the company the go-to for anyone wanting to use the technology to boost efficiency. The tech giant's subscription-based Microsoft 365 office suite is quickly becoming one of its most profitable businesses. In the company's fiscal 2023, Microsoft 365 reported a 13% year-over-year boost to revenue. Meanwhile, the platform will soon launch a range of AI-enabled products that could prove a powerful tool in attracting new subscribers.
NASDAQ: MSFT
Key Data Points
Moreover, at the Goldman Sachs Communacopia & Technology Conference, CFO Amy Hood repeated forecasts that Microsoft's AI business will be its fastest venture ever to hit $10 billion. A large part of that growth is thanks to the potential of its AI-driven productivity software, with Hood saying, "The opportunity is already there" as demand is soaring for AI enterprise software.
As the world's second-largest cloud platform, Microsoft's Azure still has solid prospects in AI. However, the company's leading position in productivity software diversifies its position in AI and makes its stock an attractive investment this month.
