Everything appears to be going right for Microsoft (NASDAQ:MSFT) stock. The technology giant just completed its $68 billion takeover of video game maker Activision Blizzard. It’s monetizing its artificial intelligence products and pull ahead in the race for AI supremacy. Exceptional Q3 financial results showed continued strength in cloud-computing and legacy software.
With the wind in its sails, MSFT stock rose 8% in October, outpacing the broader market that saw the benchmark S&P 500 index fall 2.2% and the technology-laden Nasdaq drop 2.8% during the month. With so many things working in its favor, there’s every reason to believe that the bull run in Microsoft’s stock has only just begun.
AI Leadership and MSFT Stock
Microsoft remains a leader in AI. Having poured more than $10 billion into ChatGPT creator OpenAI and integrated the technology into its Bing search engine, Microsoft leads competitors, including Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL).
The company is moving to monetize its AI offerings and ensure that the revolutionary technology boost its bottom line.
Besides enhancing the Bing search engine, Microsoft is integrating GPT-4, the successor to ChatGPT, into its Microsoft 365 software. It bundled a generative AI assistant called “Copilot” with its Microsoft 365 suite of apps. More than 150 million workers worldwide could have access to Copilot, which will help them generate documents and emails more easily.
Microsoft has said that Copilot should help to revolutionize the white-collar work environment, though it comes at a price. Microsoft is charging $30 a month per user for access to Copilot, which is available as an upgrade to customers who shell out the additional money.
Some analysts have estimated that the Copilot AI feature will add 83% per user to the monthly software bill of many companies. Microsoft is also adding AI to its Azure cloud-computing platform and also charging for it.
It’s early days, but analysts say they are encouraged to see Microsoft moving to monetize its AI offerings.
Cloud-Computing Growth
The acquisition of Activision Blizzard will no doubt help Microsoft’s strength in video games through its Xbox unit. However, some analysts following MSFT stock are more focused on growth in the company’s Azure cloud-computing unit.
Cloud-computing is in demand and expected to be a major catalyst for AI. And here too, Microsoft is showing impressive progress. The company’s recent Q3 earnings out-performance was mostly due to its cloud-computing business.
Microsoft said that its Azure cloud-computing business grew 28% in the quarter, well ahead of consensus forecast for growth of 25%. The company has forecast that its Azure cloud-computing unit’s Q4 growth will come in at 26% to 27%.
It also expects revenue in its Intelligent Cloud business segment to rise 17% to 18% in the current fourth quarter. Microsoft Azure is now in second place in the cloud infrastructure service segment behind only Amazon Web Services.
Tax Bill
If there’s one headwind facing Microsoft right now, it is an unusually large tax bill the company has received courtesy of the Internal Revenue Service.
Following an extensive audit, the IRS has ordered Microsoft to pay $28.9 billion in back taxes, plus interest and penalties, for the years 2004 to 2013. The IRS has said that the tax bill is because of the way Microsoft allocated profits among countries and jurisdictions.
Despite the large amount, Microsoft doesn’t appear overly concerned about the taxes owing, which it plans to contest, in court if necessary.
In the blog post, Microsoft said that it has been working with the IRS for years to address how it allocated income and expenses for the 10-year period that began in 2004. The company has since changed its corporate structure and practices to comply with the IRS rules.
Buy MSFT Stock
Year to date, MSFT stock has risen 45%. While strong, the company’s share price performance has trailed most other mega-cap tech concerns, with Meta Platforms (NASDAQ:META) stock up 150% on the year.
MSFT stock is also currently 5% below its 52-week high and the median forecast of analysts is for the company’s stock to rise another 18% in the coming 12 months. With everything seeming to work in its favor right now, investors should consider a position in this leading tech name. MSFT stock is a buy.
On the date of publication, Joel Baglole held long positions in MSFT and GOOGL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
