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2 Green Flags for Microsoft's Future

Motley Fool - Tue Oct 17, 2023

Microsoft(NASDAQ: MSFT) has been a company to watch this year after becoming one of the biggest names in artificial intelligence (AI) and completing its purchase of game developer Activision Blizzard. The tech giant is on a promising growth trajectory as it expands in multiple areas of tech and could have a lot to offer investors over the long term.

Only a decade ago, Microsoft appeared to be fading from relevancy, losing ground to the likes of Apple and Alphabet. However, current CEO Satya Nadella has pulled off an impressive turnaround since taking on the position in 2014. The company has rebuilt itself and could prove unstoppable in the coming years.

So, here are two green flags for Microsoft's future.

1. Arguably the most influential company in artificial intelligence

In 2023, Microsoft has emerged as a major player in AI. The company's over $10 billion investment in ChatGPT developer OpenAI has granted it a 49% stake in the start-up. The partnership gave Microsoft a head start in the industry, coming out ahead of cloud rivals Amazon and Alphabet.

Microsoft has hastily integrated OpenAI's technology across its software lineup, including updates to its cloud platform Azure, Office productivity suite, Bing, and more. OpenAI CEO Sam Alterman told The Information last week that the company is generating revenue at a pace of more than $1 billion a year. OpenAI's revenue in 2022 totalted $28 million. However, the start-up's AI technology and the potency of Microsoft's productivity brands could prove a killer combination.

Alongside attracting customers to its AI services on Azure, Microsoft is monetizing its AI expansion by adding new tools to other platforms.

The company will soon launch Copilot, an AI assistant for Microsoft 365 users that will debut as a $30 add-on to a regular 365 subscription. Copilot could be the start of a lucrative future for the company as it expands its AI offerings.

Data from Grand View Research shows the AI market was valued at $137 billion in 2022 and is projected to expand at a compound annual growth rate of 37% through 2030. Meanwhile, with its cloud services and various productivity platforms, Microsoft is well positioned to become the go-to for the millions of businesses and consumers looking to add AI to their daily workflows.

The popularity of Microsoft's products has made it one of the most influential companies in AI, and you won't want to miss out on its future in the sector.

2. Completing the biggest video game deal in history

In January 2022, Microsoft announced plans to acquire Activision Blizzard in a deal worth a record $69 billion. The purchase has been held up by antitrust concerns, with regulators worldwide performing checks on whether it would grant Microsoft too much control of the market. However, the deal officially went through last week when U.K. regulators gave their approval after some revisions to the acquisition.

Activision Blizzard is home to some of the world's most profitable game franchises, including Call of Duty, World of Warcraft, Candy Crush, and more. The valuable library of titles will be an asset in expanding Microsoft's Xbox brand and Game Pass service.

Game Pass is a subscription-based platform, often described as a Netflix for games, which has proven useful in attracting new users to the company's consoles and services. Xbox Game Pass has rapidly grown since its launch in 2017, with subscribers increasing by 150% between 2020 and 2022.

When purchasing a console, consumers have long faced the question of whether to buy Sony's PlayStation or an Xbox. However, Xbox Game Pass has strengthened the argument for Microsoft's console, increasing the value of an Xbox as users can pay a monthly fee for access to a large library of games rather than paying for titles individually. Introducing Activision's games to Game Pass will only make Xbox consoles and services more attractive to shoppers.

Microsoft's annual revenue has risen 68% over the last five years, with operating income up 106%. However, there's no telling how far those figures could climb over the next five years as it continues to expand in AI and video games. Microsoft has massive potential over the long term, making its stock a screaming buy right now.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Dani Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Activision Blizzard, Alphabet, Amazon.com, Apple, and Microsoft. The Motley Fool has a disclosure policy.

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