If you think Microsoft (NASDAQ:MSFT) is a sleepy boomer stock, think again. This morning, the company announced it will buy voice-recognition leader Nuance Communications (NASDAQ:NUAN) for $16 billion — its biggest acquisition since LinkedIn. And this has major implications for MSFT stock.
There’s a lot more to this story than today’s buzz, which centers around the acquisition as a tuck-in healthcare play. Growth investors take note: This is the start of the new-new Microsoft (redundancy intended). With a single acquisition, the software giant just changed the conversation around enterprise software, cloud networking and internet search.
MSFT Stock: It’s Big, and a Lot More Than Healthcare
This morning, Microsoft announced its buying Nuance Communications for about $56 per share in cash, a 23% premium to the shares’ Friday closing price. Valued at $16 billion, this is Microsoft’s biggest acquisition since it bought LinkedIn for more than $26 billion in 2016. Today’s announcement is a clear signal the tech giant is hunting for more growth. The company is reported to be in talks to buy the chat app Discord for $10 billion. Last month, it bought gaming company Zenimax for $7.5 billion.
On the heels of recent Discord and gaming buzz, investors may be scratching their heads as to why Microsoft would make what looks to be a very big healthcare acquisition. The bottom line: Nuance is much more than a feather in the company’s cap. It’s a bold strategic move that’s about to change the way we interact with ALL technology — whether it’s with enterprise software, cloud computing or internet search.
And unlike Microsoft’s checkered past of bold acquisitions, this one’s different. With the potential to integrate natural language understanding, MSFT is about to change the way we think about our computers: a world where they can see, hear, talk and understand as humans.
Nuance, founded in 1992 with roughly 7,1000 employees, has a strong reputation for its voice-recognition technology. Despite its longtime status as an acquisition target for companies such as Apple, Google and Microsoft, Nuance doesn’t look growth-y at first glance. The company, which reported a 4% revenue decline last year, has a long history serving the healthcare market via its flagship speech-recognition software, Dragon. Doctors use Nuance’s speech tools for improved efficiency: faster note-taking, booking telehealth appointments and seamless integration with electronic health records.
AI on Everything
On the surface, this looks like the marriage of two companies who know each other well and share an interest in healthcare. Microsoft approached Nuance back in December, reportedly. Healthcare IT is also a massive addressable market, valued at over $96 billion. And the software giant has been steadily focused on this area since last year, having rolled out a package of industry-specific cloud software. It’s also hired executives with medical backgrounds while also investing in health-oriented machine learning and artificial intelligence (AI) tools.
Picture this: Microsoft could plug in Nuance’s AI technology to empower business conversations and organize meetings and reminders proactively. Instead of employing a voice assistant for simple utilitarian searches, Microsoft’s office suite will respond to user voice commands in more complex searches. Instead of a command like “call Susan” in a user’s contact list, the software will process and understand chained queries, such as “call my boss,” and get the right context when you ask it to add a calendar entry or organize reservations.
It sounds like the latest sci-fi flick, but the technology is years in the making. Microsoft is no stranger to conversational AI, having led speech recognition and natural language understanding for more than two decades. But despite having built-in voice recognition in many of its products, the technology never really gained traction. The reason: It focused on the wrong market.
The software giant first launched its voice assistant Cortana for iOS and Android in December 2015. Back then, it had its eyes on mobile devices and consumers. Like other tech conglomerates, Microsoft hopped onto the Internet of Things (IoT) bandwagon. The company envisioned a world of voice-powered fridges and thermostats — much like what Amazon did with Alexa, or what Google did with Google Assistant.
But that vision fell apart last month when the first and only Cortana speaker removed Microsoft’s digital assistant. Adding salt to the wound, earlier this month, Microsoft announced it would shut down Cortana on IoS and Android.
A New Way of Doing Business
Microsoft’s consumer strategy clearly didn’t pan out. But now, the tech behemoth is pivoting into a market it already dominates: the enterprise. If you look closely, you’ll see that CEO Satya Nadella has been working this angle for a while. In 2018, the company acquired conversational AI company Semantic Machines. Today, Microsoft’s AI research division combines Cortana, Bing, Ambient Computing and Robotics into a single 5,000-person unit. These moves outline a bigger, long-term strategy: to make voice technology that can work on every Microsoft product and platform.
Doubters may be wondering what’s different at Microsoft this time. After all, previous bold acquisitions, like forays into mobile handsets and social networking haven’t been big crowd-pleasers. But this time is different because it’s a cohesive, company-wide strategy that ties together all of Microsoft’s products and services.
Microsoft’s “AI on everything” concept has the potential to be the most disruptive technology story of the decade. It also has a shot at leapfrogging Amazon and Google. Combining Nuance’s tech with decades worth of internal research and development (R&D), AI is now in Microsoft’s DNA, powering everything from its 365 enterprise software, Azure Cloud offering and even Bing internet search.
Adding fuel to the fire is an entire ecosystem of over a million third-party app developers using Microsoft’s Cognitive Services open application programming interfaces (APIs) and more than 300,000 developers using its Azure Bot Service to build new features. These relationships will help drive the next wave of innovation onto the company’s products and services.
Growth investors, this is the new-new Microsoft. The Nuance acquisition is a battle axe in a quest for internet domination. Can Microsoft — and MSFT stock — win? Absolutely.
On the date of publication, Joanna Makris did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Joanna Makris is a Market Analyst at InvestorPlace.com. A strategic thinker and fundamental public equity investor, Joanna leverages over 20 years of experience on Wall Street covering various segments of the Technology, Media, and Telecom sectors at several global investment banks, including Mizuho Securities and Canaccord Genuity.