Shares of Microsoft (NASDAQ:MSFT) have lagged the performance of other mega-cap technology concerns year to date. However, with several catalysts forming there is reason to be bullish on the company’s stock.
Truly, shareholders got a jolt recently when news broke that the Internal Revenue Service (IRS) has slapped Microsoft with a bill for $29 billion in unpaid taxes. However, investors needn’t fret about the back taxes too much. Microsoft has said that it plans to contest the tax agency’s calculations and findings, in court if necessary. And it is expected to take years for the issue to be resolved, pushing the hefty tax bill far down the road. In the meantime, the Seattle-based company has received several pieces of good news recently.
Video Game Dominance
The biggest piece of positive news was that Britain’s antitrust regulator officially approved Microsoft’s $68 billion acquisition of video game maker Activision Blizzard. The approval from the U.K. Competition and Markets Authority (CMA) removed what was widely seen as the final hurdle to completing the deal. Microsoft has since finalized the purchase of Activision Blizzard. Now, the process begins for integrating the video game developer into its Xbox gaming division. Completion of the deal is seen as a major win for Microsoft and strengthens its position within the global video game sector.
Doubts about the Activision Blizzard acquisition had weighed on MSFT stock. This pressure was especially felt after the Federal Trade Commission (FTC) sued to block the deal from being completed. The U.K. CMA initially rejected the takeover on grounds that it would lessen competition and choice for consumers.
Fortunately for Microsoft, the FTC lost its case in court. Then, the British regulator eventually relented after the company agreed to some of its terms. With Activision Blizzard, Microsoft brings an experienced team of video game developers in house. It also gains control of popular video game franchises such as Call of Duty, World of Warcraft, and Candy Crush.
The global video game market generates more than $300 billion a year in sales (games and hardware combined). In fact, Microsoft controlled 25% of the worldwide market before it even bought Activision Blizzard.
AI Leadership Position
Additionally, MSFT is well-positioned to capitalize over the long term from artificial intelligence (AI). This is thanks to its $10 billion investment in OpenAI, the generative AI creator of chatbots ChatGPT and GPT-4. In July, MSFT stock closed at an all-time high after the company announced a new Microsoft 365 AI subscription service.
This illustrates the huge expectations that investors have for the company’s role in AI. Microsoft was quick to integrate ChatGPT’s technology into its Bing search engine this spring. Further, it is now adding AI to other areas of its business, notably in cloud computing and video games.
Microsoft’s new “Copilot” subscription service adds AI capabilities to its popular suite of Office products that includes Word, Excel, and Teams. Copilot can design presentations, offer writing prompts, summarize meetings, and rank incoming emails. Analysts especially like that the Copilot product costs an additional $30 per month. This price tag could increase monthly prices for enterprise customers by as much as 83%. It will help Microsoft to monetize its AI technology and provide the company with additional revenue streams.
During its last earnings release, MSFT launched its new Azure OpenAI Service for cloud computing that companies can use to access large language models and other AI tools developed jointly by Microsoft and OpenAI. Customers of Microsoft Azure quickly jumped to 11,000 from 4,500 reported in in May of this year, due to the addition of AI.
What’s Next
Microsoft’s stock is up 40% so far in 2023. While a strong return, it pales in comparison to the gains of other mega-cap tech stocks. Meta Platforms (NASDAQ:META) stock is up nearly 160% year to date. And shares of Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG/NASDAQ:GOOGL) have each risen more than 55%.
However, MSFT stock is not likely to trail for much longer. With the completion of its Activision Blizzard takeover and growth in its AI applications, Microsoft is well-positioned to outperform going forward.
Analysts at Piper Sandler (NYSE:PIPR) just named Microsoft their “highest conviction large-cap stock to own into year-end,” citing the company’s advantages in generative AI. Piper Sandler reiterated its “overweight” buy rating on Microsoft’s stock, with a $400 price target, implying 20% upside from current levels. Clearly, MSFT stock is a hot 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.