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Microsoft to Add Automated AI Capabilities With Bonsai Buyout

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Microsoft (MSFT - Free Report) continues its acquisition spree with the recently announced deal to buy Bonsai, an artificial intelligence-based (“AI”) startup. Bonsai develops AI driven technology which improves the functioning of intelligent autonomous systems. The terms of the deal have been kept under wraps.

Industries which leverage robotics, HVAC (Heating, ventilation, and air conditioning) and other automated systems can benefit a great deal from Bonsai’s tech. The tech stalwarts are concentrating on training and taming machines for the required outcomes. Facial recognition, self-driving cars, unlock systems, are instances where advanced machine learning (“ML”) capabilities are extensively required.

Microsoft is well poised to benefit from the path-breaking technology Bonsai brings on board. Notably, speculations are rife that the tech power house is working on an automated cashier less check out technology to counter Amazon’s (AMZN - Free Report) Amazon Go stores. The automated tech of Bonsai is expected to aid the company in that project as well.

Shares of Microsoft have returned 47.9% in the past year, substantially outperforming the industry’s rally of 33.5%. This outperformance can primarily be attributed to its rapidly expanding efforts in AI and Internet of Things (“IoT”) based developments. Undisturbed focus on Azure remains a key catalyst.

Focal Points of the Acquisition

Microsoft sees a lot of potential of Bonsai’s “reinforcement learning” skills in industrial AI. The tech giant already boasts of an end-to-end compilation of AI tools Microsoft Cognitive Services. It comprises intelligent APIs to ensure developers can easily utilize advanced technologies in their applications. Furthermore, Gluon open source interface and Open Neural Network Exchange (“ONNX”) format already assist deep learning.

Microsoft will utilize Bonsai capabilities to power its Azure AI platform. Bonsai’s platform in Microsoft Research will lead to a one-of-a-kind “AI toolchain” which is expected to develop “any kind of autonomous system” for calibration and control tasks. This toolchain combined with Azure Machine Learning supported by Azure Cloud will be run on Azure IoT. Consequently, Microsoft can develop a comprehensive solution for enhancing, operating and building “brains” for autonomous systems.

Per the company’s blog, autonomous systems in operation are envisioned to grow to approximately 800 million by 2025. Moreover, Boston Consulting Group data, as revealed by Siemens, projects worldwide spending in the robotics sector to reach $66.9 billion by 2025, compared with $26.9 billion in 2015. Bonsai’s addition to Microsoft’s AI portfolio is in sync with the company’s intention to gain from this immense growth.

Capitalizing on the AI revolution

We believe Microsoft is on the right track, given its increasing inclination towards AI ever than before. The company’s focus on strengthening presence in the AI market is evident from the acquisition of Berkeley, CL based Bonsai. Notably, in the past month, Microsoft acquired Semantic Machines, which introduced an extensive approach for the development of conversational AI to advance its digital assistant Cortana.

In 2017, the company acquired AI startup Maluuba, an expert in the field of deep learning and reinforcement learning for question-answering and decision-making systems. Furthermore, Microsoft acquired SwiftKet, an AI startup earlier in 2016 for $250 million. These AI-based startups widen the scale of prospects for the tech giant.

The company has also realized the immense power innovative software developers possess and how it can aid the company explore lucrative market opportunities. Recent acquisition of GitHub,the world’s largest open-source code repository, for approximately $7.5 billion reinforces the company’s ML initiatives. The GitHub-Azure integration will further strengthen Microsoft’s commitment to cloud-computing future as it aims to compete against the likes of Amazon and fellow tech giants.

Per a recent report by Grand View Research, the AI market is expected 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 putting its best foot forward to grab a major share of the projected revenue growth. Moreover, integration of AI techniques within Cortana, Office 365 and Azure presents a significant competitive edge to the company, in our view.

Zacks Rank & Key Picks

Microsoft carries a Zacks Rank #3 (Hold).

A couple of better-ranked stocks in the broader technology sector are Mellanox Technologies, Ltd. (MLNX - Free Report) and Micron Technology Inc. (MU - Free Report) , both currently flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The projected long-term earnings growth rate for Mellanox and Micron are 15% and 10%, respectively.

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