Microsoft’s share price pops after Nuance acquisition

It has been a solid year for Microsoft’s [MSFT] share price so far. Despite a slow start to January, Microsoft’s share price closed at $259.50 on 15 April, a 16.9% advance so far in 2021, and has climbed 52.5% in the past 12 months.

Most of the gains seen by Microsoft’s share price have taken place in April, with the stock advancing 10.1% since the start of the month (to 15 April’s close).

Microsoft’s share price gained 1% on 13 April, the day after it announced a major acquisition set to expand its artificial intelligence (AI) capabilities for its healthcare strategy.

Figures of speech

On 12 April, Microsoft said that it would purchase AI and voice recognition company Nuance Communications [NUAN], for $56 per share. This price was 22.9% above Nuance’s closing price on 9 April. The all-cash transaction was valued at $19.7bn and included Nuance’s net debt. Microsoft stated it intends the deal to close this year.

Mark Benjamin, CEO of Nuance, will remain in his position and report to Scott Guthrie, executive vice president of the cloud and AI group at Microsoft. The acquisition is a significant step in Microsoft’s industry-specific cloud solutions strategy, aiming to build on its Microsoft Cloud for Healthcare platform, which was launched in October 2020.

“Nuance provides the AI layer at the healthcare point of delivery and is a pioneer in the real-world application of enterprise AI,” Satya Nadella, CEO of Microsoft, said in a statement. “AI is technology’s most important priority, and healthcare is its most urgent application. Together, with our partner ecosystem, we will put advanced AI solutions into the hands of professionals everywhere to drive better decision-making and create more meaningful connections as we accelerate [the] growth of Microsoft Cloud for Healthcare and Nuance.”

"AI is technology’s most important priority, and healthcare is its most urgent application" - Satya Nadella, Microsoft CEO

Nuance, one of the firms behind Apple’s [APPL] Siri speech recognition software, provides healthcare software that automates radiology reports and allows doctors to dictate patient notes. It is already in use in 80% of US hospitals, Nadella told the BBC, which will give Microsoft a greater foothold in the healthcare industry. Dan Ives, an analyst at Wedbush Securities, described the purchase as “a strategic no brainer” for the technology giant.

The acquisition is Microsoft’s second largest ever, according to The Wall Street Journal, following its 2016 purchase of LinkedIn, and follows an aggressive bout of acquisitions over the past four years. Dealogic data reported in the publication indicated that Microsoft had made more than 100 acquisitions over the period, amounting to $26bn — not including the Nuance deal. The timing of its expansion coincides with a period when antitrust investigations against some of Microsoft’s biggest tech rivals, including Facebook [FB], Amazon [AMZN] and Alphabet [GOOGL], hinder such companies’ abilities to strike similar deals.

AI’s healthy rise

With this in mind, the acquisition is likely to create ripples across the AI, healthcare and technology sectors. A recent report from ResearchAndMarkets.com predicts the global AI healthcare market will grow from $4.2bn in 2020 to $27.2bn by 2025. The coronavirus pandemic has expedited the rise of AI in healthcare, with many pharmaceutical and biotech companies deploying the technology to develop vaccines and drugs to fight the virus.

While some of Microsoft’s competitors in the space are otherwise engaged, others — especially IBM [IBM] — have made waves. IBM acquired Red Hat in 2019 to expand its open hybrid cloud technologies. IBM then announced on the 14 April that it would build a new platform to integrate services such as IBM Watson Health through the cloud.

Both Microsoft and IBM are held in the iShares Global Tech ETF [IXN], which is one of the funds under the AI & Deep Learning heading on Opto’s Thematic Performance Screener. Microsoft was the fund’s second largest holding (behind Apple), weighted at 15.77% of the fund’s value (as of 15 April’s close).

IBM was much further down the holdings list, with a 0.96% weighting of the fund’s value. The iShares Global Tech ETF closed 15 April up just short of 10% in the year to date and 69.4% in the past 12 months.

Microsoft’s positioning within the booming healthcare AI field was one of many reasons it was viewed favourably by analysts, with 30 out of 34 polled by CNN Money giving the stock a buy rating.