ChatGPT, a generative AI program that can talk and write like a human, is one of the most talked about topics in 2023.

People are excited about it because it can provide instant responses to questions on various topics.

Microsoft has spent a lot of money on ChatGPT of OpenAI and is adding this technology to many of its products, including its core products Bing, Office 365, and Azure.

As the software giant has been struggling with slowing revenue and profit growth in recent quarters, we're asking: will the boom of generative AI become a new growth driver for Microsoft? Let's find out！

01 Business Model

Bill Gates and Paul Allen founded Microsoft during the emergence of personal computing in 1975, with the aim of creating operating system software for PCs.

Over time, Microsoft's Windows operating system gained widespread adoption and became the dominant player in the PC market. As the company grew, it diversified into various areas, such as productivity software, video games, cloud service, and hardware products.

Microsoft currently divides its products and services into three main segments:

● Productivity & Business Processes

● Intelligent Cloud

● More Personal Computing

Microsoft generated revenue of US$198.3 billion and brought in an operating income of US$83.38 billion in FY22. The majority of Microsoft's revenue comes from its Intelligent Cloud and Productivity & Business Processes, accounting for 37.95% and 31.96%, respectively.

Here is the business breakdown for Microsoft：

02 Strength

Since Satya Nadella took the helm from Steve Ballmer in February 2014, the company's value has grown by over 800%.

Under Nadella's leadership, Microsoft emphasized crucial areas such as cloud computing and artificial intelligence (AI). In March 2018, Nadella overhauled the company's organizational structure, deprioritizing Windows while giving more importance to cloud and AI.

This strategy has paid off. In FY23 Q2, the Intelligent Cloud segment generated revenue of US$21.5 billion, representing an 18% year-over-year increase. This segment contributed 41% of the total revenue and 44% of the operating income.

03 Growth Potential

Microsoft is using AI to improve its software and cloud computing services.

The company has not only invested in OpenAI to advance its AI development but also swiftly incorporated ChatGPT into its core products, such as Office 365 and Azure.

By doing so, Microsoft may solidify its position as a leader in enterprise software and continue to grow its cloud computing market share.

Currently, Microsoft is the second-largest cloud infrastructure service provider with a 23% market share, behind Amazon Web Services (AWS) at 33% and ahead of Google at 11%.

Azure has nibbled away at AWS' market share over the past few years (Azure held just 15% of the market at the end of 2018). With the incorporation of AI into Azure, Microsoft may be able to expand its share of the cloud market even further.

04 Financial

Microsoft's revenue and profit growth are key indicators to watch, as some worrying signs have shown up over the past few quarters.

In FY23 Q2, Microsoft's revenue only increased by 2% to US$52.75 billion, while its net income decreased by 12.47% to US$16.43 billion, marking the fifth consecutive quarter of slowed revenue growth. Its profit growth has been negative since the first quarter of fiscal 2023.

The decline in revenue and profit might be attributed to the slowing growth of cloud computing revenue and weak performance in the PC-side business. Additionally, the appreciation of the US dollar caused by rate hikes has led to an exchange loss, further dragging down the company's performance.

To address these issues, Microsoft may need to focus on developing new growth engines, such as AI.

05 Risk

● Currency

Microsoft's exposure to exchange rate fluctuations might affect its financial performance and cash flows.

● Competition

Microsoft encounters intense competition in all markets where it offers its products and services, which can potentially eat into the company's revenue and operating margins.

For instance, Microsoft's cloud computing platform, Azure, competes with a range of established players in the market, including Amazon Web Services (AWS), Google Cloud Platform, IBM Cloud, Oracle Cloud, VMware, and various open-source offerings.