Microsoft Corporation (NASDAQ:MSFT) is serious about both augmented reality (AR) and artificial intelligence (AI). The company just posted that its HoloLens 2 will be equipped with a custom designed AI chip that will put artificial intelligence directly on the AR headset instead of requiring a server connection. This move shows a serious determination to grab a chunk of the growing AR market, and bolsters its aim to be the leader in AI cloud computing — two things that could quickly provide more growth to MSFT stock.
In a blog post over the weekend, MSFT announced that it is designing its own custom AI chip for the HoloLens 2 AR headset. This AI co-processor will provide low-latency performance gains, while also reducing battery drain.
By custom-designing its own AI chip, Microsoft can significantly improve the AR experience on the HoloLens, while offering some real advantages to potential buyers. The big one is that with the AI chip onboard, the HoloLens 2 will offer advanced processing power without requiring a cloud (internet) connection. That cuts reaction time, eliminates bandwidth use and reduces battery use.
Another advantage of an onboard AI chip — and one that commercial AR customers in particular will take note of — is that all the data stays local instead of being uploaded. That’s a security win.
In addition to making the HoloLens 2 an even more compelling AR headset, designing its own custom AI chip has a benefit for Microsoft’s growing cloud computing business. That chip expertise is applicable to the rapidly increasing demand for AI cloud computing.
The Increasing Importance of Azure to Microsoft
MSFT stock got a lift last week after Microsoft’s Q4 2017 earnings report, in which the company said its Azure cloud computing revenue was up 97%.
Overall, the company’s Intelligent Cloud revenue (which includes Windows Server) hit $7.4 billion for the quarter — nearly one-third of MSFT’s total revenue. It’s just below the $8.4 billion generated by the Productivity and Business Processes division, which includes Microsoft Office and LinkedIn.
As The Verge points out, by designing its own AI chip for the HoloLens 2, MSFT is in the position of being able to leverage that expertise in its goal to be the “number one AI cloud.”
With the public cloud computing market expected to continue growing to hit over $383 billion by 2020 (it was just over $209 billion in 2016), Azure has the potential to become Microsoft’s most important product or service.
Bottom Line on MSFT Stock
The HoloLens has been official since Microsoft surprised everyone with its AR headset in 2015. However, you won’t find it on any financial reports — unless it’s buried in the R&D expenditures.
That’s because the company has never released the HoloLens as a commercial product. To date, it has been a technology showcase, used to wow conference attendees.
But the HoloLens 2 is rumored to be a production-ready version, expected to hit shelves by 2019.
The market for AR headsets in 2016 was small. Just $209 million. But many analysts see AR as having far more commercial potential than VR, not just with consumers but also in the growing commercial market. IDC projects that $209 million will rapidly grow to $48.7 billion in annual AR headset sales by 2021.
Most of the big tech companies have been focused on virtual reality to date, but if Microsoft can launch an advanced HoloLens 2 headset complete with its own AI chip, MSFT stock stands to benefit as Microsoft becomes an augmented reality leader.
The biggest challenger at this point is shaping up to be Apple Inc. (NASDAQ:AAPL), which has its own iPhone-based AR ambitions. Even if Apple nails it with AR, the HoloLens 2 headset is a more advanced solution than an iPhone-based approach, which would be more suited to casual, consumer use. Combined with Microsoft’s enterprise and gaming connections, the HoloLens 2 — if MSFT can get it onto shelves — will be in a solid position to capture a significant share of that $48.7 billion.
Today, the HoloLens contributes nothing to Microsoft’s bottom line. But a HoloLens 2 complete with its own onboard, custom AI chip has the potential to become an important product for MSFT stock in 2019.
And the R&D going into developing that silicon could also translate into big wins on the cloud computing front, continuing to drive Azure’s impressive growth.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
