Shares of Microsoft Corporation (MSFT - Free Report) rallied to a 52-week high of $102.6 on Jun6, eventually closing marginally lower at $102.49. The momentum can be attributed to its recent acquisition of GitHub as well as increasing traction in conversational AI.
Shares of Microsoft have returned 20.9% year to date, outperforming the industry’s rally of 18.4%. The outperformance was driven by the company’s rapidly expanding efforts in AI and IoT based developments. Moreover, uninterrupted focus on Azure remains a key catalyst.
The stock has a market cap of $789.15 billion.
What’s Behind the Rally?
Cloud Computing Initiatives
Microsoft’s acquisition of the open-source software development platform giant, GitHub will helpthe company in becoming more future-oriented by encouraging more developers to create services and apps.This in turn will aid Azure to compete better against other computing giants by being more appealing to customers.
The tech powerhouse projects the acquisition to be accretive to non-GAAP operating income in fiscal 2020. Investors should note that Microsoft expects the buyout to dilute adjusted earnings by roughly 1% in fiscal years 2019 and 2020.
Traction in Conversational AI
Microsoft is also gaining from its increasing traction in conversational AI. The software pioneer recently acquired Berkeley, CA-based Semantic Machines, which has a new approach for the development of conversational AI. With the buyout, the company is likely to gain a competitive edge in the conversational AI industry.
Notably, Microsoft has been working on speech recognition and natural language understanding for the development of its conversational AI initiatives. The company had earlier introduced pre-built Cognitive Services into its intelligent assistants. Microsoft Cognitive Services and Azure Bot Service have found a number of takers already.
Furthermore, the tech giant’s digital assistant Cortana has aided the accelerated adoption of its virtual assistants powered by conversational AI. The addition of Semantic Machines is expected to enhance Microsoft’s overall conversational AI capabilities, consequently helping it gain a strong foothold in the industry.
Per a recent report by Grand View Research, the AI market is anticipated to hit $35.9 billion by 2025 at a CAGR of 57.2% with 2017 as the base year. The projected figure takes into account direct revenue sources.
Given the huge growth prospect in the industry, Microsoft is striving to grab a major share of the projected revenue growth.
Self-Driving Initiatives Bode Well
In a bid todrive the autonomous vehicle revolution forward, Microsoft collaborated with MapboxInc, a mapping startup. Microsoft Azure IoT platform’s open sourced Azure IoT Edge Runtime will be integrated with Mapbox’s recently unveiled Vision SDK.
When integrated with Vision SDK, the detected events will aid the software builders develop responsive application which will provide accelerated feedback to the driver.This will ensure proper streaming of semantic event data directly into Azure Cognitive Services for detailed analysis on the back end. On a regular basis, this back-end event data will aid the developers to enhance algorithms accordingly.
Additionally, the road data on the back end will provide analytic solutions for insurance companies, smart cities, and more.This will consequently enhance the driving experience.
Autonomous driving backed by AI is expected to reduce accidents due to human errors. Per a recent report by Grand View Research, the ADAS market is expected to hit $67.43 billion by 2025. The Verge, on the other hand, quoted Intel stating that there is a $7 trillion self-driving future ahead.
Socially Responsible Moves
Microsoft is also one of the largest providers of gaming hardware. The Xbox One X has a wide adoption rate. Moreover, robust performance of its surface line of devices is driving the top line.
Microsoft recently unveiled a new gamepad, Xbox Adaptive Controller, which is aimed to ensure “gaming for everyone”. The controller, priced at $99.99, can be personalized as per the requirements of the specially-abled gamer.
In the gaming console market, XBox can gain a competitive edge with the new Adaptive Controller over Nintendo, which doesn’t have significant improvement in features for differently-abled gamers.
Meanwhile, Sony’s PlayStation 4 has controllers which make gaming comparatively easier for differently-abled over Play Station 3, thanks to its reorganized operating system as well as user interface (“UI”) and tighter controls.
Per an IDC study, total spending in home game console market for the years 2018 and 2019 is projected to be more than $45 billion each.Per Statista, PwC projects console games industry revenues to grow by 2.43% per year between 2015 and 2020.
In the recently reported third quarter, Microsoft’s gaming revenues increased 18% (16% at constant currency) to $2.25 billion, driven by robust performance from Xbox software and services (up 21% at cc). Xbox Live monthly active users were up 13% to 59 million active users.
At the Build conference this year, Satya Nadella also announced a special initiative for the disabled with an initial funding of $25 million to develop AI for people with disabilities, whether temporary, permanent or situational.
The aforementioned initiatives in the emerging technologies space is likely to boost the top-line, going forward.
Azure Remains Key Catalyst
Microsoft’s cloud services form a major contributor to its top-line growth. The company is also committed to reorganizing itself around its cloud-computing businesses and Office business, instead of Windows.
In the third quarter, the company delivered revenue figures of $26.82 billion, topping the Zacks Consensus Estimate of $25.71 billion. Furthermore, Microsoft’s Intelligent Cloud unit revenues, which comprise its rapidly growing Azure segment, climbed roughly 17% to reach $7.79 billion. Azure revenues alone soared 93%, after skyrocketing 98% last quarter.
Microsoft’s Azure has witnessed a significant boost due to the increasing adoption of cloud-based technologies.Moreover, continuing robust adoption of Azure will drive Microsoft’s top-line growth. According to data from Synergy Research, Azure trailed only Amazon Web Services in the cloud infrastructure services market.
Positive Surprise History & Northbound Estimate Revision
Microsoft has outpaced the Zacks Consensus Estimate in the trailing four quarters delivering an average positive surprise of 19.5%. The company is witnessing northbound estimate revisions — up 14 cents to $3.84 per share for the current year in the last 60 days.
Further, the company has a long-term expected EPS growth rate of 11.96%.
Zacks Rank and Key Picks
Microsoft carries a Zacks Rank #3 (Hold).
Some better-ranked stocks trading at 52-week high include NVIDIA Corporation (NVDA - Free Report) , Microchip Technology (MCHP - Free Report) and Twitter (TWTR - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Long-term earnings growth rate for NVIDIA, Microchip and Twitter are currently pegged at 10.25%, 14.02% and 23.1%, respectively.
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