3 Things About Microsoft That Smart Investors Know
Microsoft (NASDAQ: MSFT) shares have climbed 40% year to date thanks to the company's growing lead in artificial intelligence (AI). It was an early investor in the industry, allowing it to get a head start on the competition. Companies such as Amazon and Alphabet have expanding AI ventures and have spent the first half of this year playing catch-up to Microsoft.
However, the Windows company has multiple high-performing productivity services that have drawn millions of customers worldwide. Microsoft has the name recognition and user base that could make it the go-to company for anyone seeking AI services. Here are three things that smart investors know about Microsoft right now.
1. The potential to hit $10 billion in AI revenue
At the Goldman Sachs Communacopia & Technology Conference last week, Microsoft CFO Amy Hood reiterated the company's forecast that its AI division will hit $10 billion in revenue faster than any of its previous business ventures.
The company invested $1 billion in ChatGPT developer OpenAI in 2019, which has massively boosted its prospects in the industry. Microsoft has procured exclusive licenses on several of the start-up's AI models, enabling it to expand many of its homegrown platforms. Word, Excel, Bing, and Azure have each received AI upgrades. Meanwhile, the company's subscription-based Microsoft 365 office suite will soon launch a range of AI-enabled products.
AI has the potential to improve countless industries, from education to healthcare, consumer products, robotics, self-driving cars, and more. However, one of the most lucrative areas of the market seems to be convincing businesses to adopt AI tools in their daily workflows. And Microsoft is well-equipped to massively profit from this part of the industry.
Between its cloud platform Azure and a wide range of productivity tools, Microsoft has the dominance to become the top choice for anyone seeking AI services to boost efficiency in their businesses. Potent brands like Windows, Office, and Azure could even give it more potential in the market than top competitors like Amazon.
2. Heavily investing in the chip industry
Microsoft is committed to developing the AI market for the long term and has realized the industry is not possible without powerful hardware. As a result, it is steadily investing in multiple chipmakers as it seeks to increase competition in an industry currently ruled by Nvidia.
Earlier this year, a Bloomberg report revealed Microsoft was providing financial and engineering support to Advanced Micro Devices' AI chip expansion. Then, this month news broke that chip start-up d-Matrix had raised $110 million from investors that include Microsoft.
According to Reuters, "d-Matrix sets itself apart from Nvidia, in part, because its technology aims at the 'inference' portion of AI processing and does not compete with Nvidia by making technology that trains large AI models." The investment from Microsoft helps it diversify its position in the chip market, backing a separate part of the industry from AMD and Nvidia.
D-Matrix projects it will earn $10 million in revenue in 2023, primarily from customers buying its chips to test. However, it expects to generate between $70 million to $75 million in annual revenue in two years as AI chip demand soars.
3. Consistent dividend growth
Unlike tech giants like Amazon and Alphabet, which don't offer dividends, Microsoft is on the higher end of the market. Its dividend yield is 0.81%, significantly higher than Apple's 0.53%.
Moreover, Microsoft has consistently raised its dividend yield over the last decade, with its cash amount climbing from $0.28 in 2013 to $0.68 this year. The company's expanding role in AI, a market projected to develop at a compound annual growth rate of 32% through 2030, could bolster earnings and raise its dividend.
The company's dividend isn't as attractive as Verizon's, for example, which offers a yield of around 7%. However, the steady growth proves Microsoft is on the right track, making its stock a compelling investment right now.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, 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 Advanced Micro Devices, Alphabet, Amazon.com, Goldman Sachs Group, Microsoft, and Nvidia. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
