Collaboration with the goal of developing AI in the Middle East

 G42, which also focuses on AI technologies, will use Microsoft's Azure cloud platform for its applications as part of this collaboration. At the same time, G42's extensive language model called Jais will be made available in the platform's language model catalogue. As part of this collaboration, the companies have agreed to further develop artificial intelligence to make these technologies available in the regions of the Middle East, Central Asia and Africa where they are still underutilised. In addition, the agreement secured Microsoft a seat on the G42 Supervisory Board. Given that representatives of the United States and United Arab Emirates governments also worked on the agreement, it is clear that it is not purely about Microsoft's interests, but is aimed at strengthening US influence in the Gulf region. G42 has also already partnered with OpenAI, a non-profit organisation that is Microsoft's main partner in artificial intelligence. G42 has been linked to China in the past because of its holdings in Chinese companies, but has cancelled those holdings at the request of US authorities.[1]

Investment in OpenAI

Microsoft has already invested in its aforementioned partner, OpenAI, in 2019 and 2021. However, earlier last year, it expanded this collaboration by an additional $10 billion, bringing the total investment to $13 billion.[2]OpenAI CEO Sam Altman met with hundreds of Fortune 500 company leaders earlier this month, where he gave a presentation on various AI services with enterprise applications. Some of the attendees at the presentation were already clients of Microsoft in the AI services space, so such a move by OpenAI could also be seen as an effort to compete with its "benefactor" in its own territory. The maker of the popular ChatGPT, with a market value of approximately $86 billion, is looking to expand its revenue sources to reach its stated annual revenue target of $1 billion.[3]

Blizzard games return to the Chinese market

Activision Blizzard, the game company owned by Microsoft since last year, will be able to re-release its games in the Chinese market through its distributor there, NetEase. Following the termination of the 15-year collaboration between NetEase and Blizzard early last year, which was preceded by a dispute, Microsoft has reached an agreement with the Chinese side to relaunch games, including "World of Warcraft", as Activision Blizzard seeks to re-establish its presence in the Chinese market, which is very important to the gaming industry. In addition, Microsoft and NetEase have also agreed to explore the possibility of launching new games on consoles such as the Xbox.[4]

Financial results

For the second quarter of fiscal year 2024 (the period from October 1 to December 31, 2023), Microsoft reported revenues of $62 billion, an 18% year-over-year increase from the comparable period. Microsoft's net income for the quarter was $21.9 billion, a significant increase of 33% from the previous fiscal year.

According to the earnings report, cloud services revenue increased by 24% year-over-year and was a significant contributor to the company's overall profit. A wide range of products, including Azure, contributed to the growth. The completion of the acquisition of Activision Blizzard, Inc. provided Microsoft with new opportunities in the gaming industry, which resulted in a 61% increase in Xbox content and services revenue. Despite the revenue growth, Microsoft was able to manage operating costs effectively, resulting in a significant increase in operating profit and net income. The company also reports that the implementation of artificial intelligence in its technology has also led to positive growth.[5]

Prospects

Microsoft will report its third quarter fiscal year 2024 (period from January 1 to March 31, 2024) results on April 25.[6] CFRA, a financial research firm, raised its 12-month price target on Microsoft stock to $475 from $455 per share and maintained a "strong sell" rating. It also expects the company to deliver 15% revenue growth and earnings per share of $2.84 in the third quarter, with Azure expected to grow by 29%. AI is expected to account for 6%-8% of this growth, according to the analysis. The PC segment is also expected to grow 14%, driven by the Activision company.[7] [1]

Microsoft's share price development over the last 5 years (Source: Google Finance)*

Conclusion

Microsoft remains synonymous with global technological progress and has long been much more than just a software company. Its investments in technological development have helped various innovative projects around the world, such as the aforementioned partnerships with G42 in the Middle East and the non-profit organisation OpenAI. This company is not only part of the AI revolution, but also one of its main creators. Many financial analysts believe that this AI boom is just the beginning.

Adam Austera, Principal Analyst at Ozios

[*] Past performance is no guarantee of future results

[1] Forward-looking statements are based on assumptions and current expectations, which may be inaccurate, or on the current economic environment, which may change. Such statements are not guarantees of future results. They involve risks and other uncertainties that are difficult to predict. Results may differ materially from those expressed or implied by any forward-looking statements.

[1]  https://www.investing.com/news/stock-market-news/microsoft-invests-15-bln-in-abu-dhabi-ai-firm-g42-takes-board-seat-3379313

[2] https://finance.yahoo.com/news/microsofts-near-term-fate-is-in-openais-hands--for-better-or-worse-205250812.html

[3] https://www.investing.com/news/stock-market-news/exclusiveopenais-altman-pitches-chatgpt-enterprise-to-large-firms-including-some-microsoft-customers-3376595

[4] https://www.investing.com/news/economy/microsoft-and-netease-to-relaunch-warcraft-game-in-china-ending-feud-3372323

[5] https://www.microsoft.com/en-us/investor/earnings/fy-2024-q2/press-release-webcast

[6] https://www.investing.com/news/press-releases/microsoft-announces-quarterly-earnings-release-date-93CH-3375792

[7] https://www.investing.com/news/company-news/microsoft-shares-price-target-raised-by-cfra-all-eyes-on-azure-93CH-3378540