It's no secret that Microsoft (MSFT -0.18%) is a powerhouse in the tech world. With a long history of groundbreaking innovations, this company has proven time and time again it's at the forefront of emerging trends.
And now, the company has set its sights on artificial intelligence (AI) -- a wise and forward-thinking move. AI is poised to change the game in countless industries, and Microsoft has positioned itself as a leader in this exciting new revolution.
Despite the optimism about Microsoft's long-term outlook, its latest earnings report was a mixed bag. On the one hand, the tech giant beat expectations on both revenue and earnings for the fiscal fourth quarter of 2023, ended June 30. On the other hand, investors felt less than enthusiastic about the company's revenue forecast, which fell short of what analysts predicted.
As a result, after it released the report, the company's stock dropped 4% the next day and continued declining in the ensuing days. But this could be an opportunity to consider buying.
Management is fully committed to the development of AI
In today's fast-paced world, it's no secret that technology is constantly evolving. With every new advancement, the market shifts. But companies that stay ahead of the curve, that genuinely understand how to harness the power of the latest technology, are the ones that come out on top.
Microsoft's top executive, Satya Nadella, thinks AI is the next major technology shift in the market. He believes the company that becomes a market leader in AI will garner the lion's share of the riches this technology will produce over the next several years. Therefore, he is going all out to make his company a leading provider of AI solutions to cash in on this new secular trend.
One of Microsoft's most notable moves in recent years was its $13 billion investment in OpenAI, a leading organization that develops advanced AI technologies such as ChatGPT. In addition to being a financial investment, OpenAI granted Microsoft access to its AI research and development resources. This helped it build its own AI products and services, such as Azure AI, which is a cloud-based service that gives developers and data scientists the tools to develop and deploy their AI solutions.
Microsoft has also reportedly begun integrating new generative AI technology into its traditional products, such as Word, Outlook, and PowerPoint. Additionally, it is developing new features such as Windows Copilot, an AI assistant for Windows 11 devices.
Another feature is Bing Chat, a conversational AI tool that can generate human-like text in response to various prompts and questions. And with Visual Search in Chat, Bing can interpret and answer questions about user-uploaded images. Users engaged in over half a billion chats in the first 90 days after the company launched these chat features in Bing.
The company also moved to cater to businesses through Bing Chat Enterprise. This version of Bing Chat ensures the safety of user and company data while also facilitating various tasks, including content creation, data analysis, document summarization, skill acquisition, coding, and more.
It faces significant competition
Although Nadella may claim Microsoft is the leader in AI technology, the company faces significant competition from Alphabet.
It's easy to get caught up in the excitement of OpenAI-Microsoft's ChatGPT, but remember that Google has been working on generative AI for a while now. In fact, it released Bard only four months after OpenAI released ChatGPT. It has also made many competing AI products in a short period that are arguably just as good as Microsoft's offerings, if not better.
The competition for AI dominance between these two giants will likely be fierce in the upcoming years.
But Google and Microsoft aren't the only ones in the game. Meta Platforms has impressive AI capabilities and plans to create chatbots that could prove disruptive to other players on the board. And there are rumors that Apple will soon enter the generative AI arena with its own chatbot, Apple GPT.
It's still early days for this incredible new technology, so we'll have to wait and see who comes out on top.
Other investor concerns
During the fourth-quarter earnings call, Microsoft investors were eager to hear about how the company's new AI initiatives offset headwinds from a weak economy and unfavorable foreign exchange rates, leading to a revenue boost. However, they learned the impact of AI on revenue will take more time. CFO Amy Hood disclosed that she expects AI will help increase revenue more in the second half of fiscal 2024 rather than the first half.
In addition, investors discovered the company must invest more in its cloud infrastructure to support future AI growth before that revenue boost arrives. Thus, free cash flow may fall short of expectations over the next few quarters.
Consider it for your buy list
Microsoft has a robust and diversified business model generating consistent revenue and earnings growth from various segments, such as advertising, cloud computing, productivity software, gaming, and hardware. This helps mitigate the risks and challenges it faces in highly competitive and dynamic industries like AI.
Microsoft's stock price may remain sluggish over the next several quarters until AI growth kicks in, but it is worth considering buying today for its long-term growth potential.
