Microsoft Corp. is gearing up to reveal more about its artificial intelligence (AI) growth, a topic that has garnered significant attention since the company’s investment in OpenAI, the mastermind behind the widely popular ChatGPT chatbot. The impact of AI on Microsoft’s Azure cloud-computing business has already started showing positive trends, surpassing Google Cloud provided by Alphabet Inc. However, the potential of AI for Microsoft goes well beyond the cloud. By integrating AI into its software products through Copilot technology, which became available to enterprise customers in November, Microsoft is poised for further growth. Investors eagerly await the financial outcomes, as Microsoft prepares to release its fiscal second-quarter results.
The Influence of Copilot
Analyst Kirk Materne from Evercore ISI predicts that Copilot will have a significant impact on revenue growth, particularly in the second half of the year. The level of interest in Copilot is remarkably high, and it is only a matter of time before adoption starts to accelerate. Although it may be too early to provide quantitative data on the success of Microsoft 365 Copilot, observers hope to gain insight into its performance.
A Qualitative Outlook
Guggenheim analyst John DiFucci believes that any indications of the effect of Copilot and OpenAI on Microsoft’s business will likely be qualitative in nature. While these AI technologies play a role, the Office business experiences other noteworthy tailwinds such as broad price increases and renewals of previously discounted deals at higher prices. Therefore, while there may not be specific quantitative data, the strategic impact can still be observed.
Marching Ahead
Looking at the bigger picture, Microsoft is expected to deliver strong results for the December quarter. The company’s guidance for the critical Azure, Office, and Windows businesses in the March quarter is anticipated to be at least in line with expectations. As Microsoft continues to expand its AI capabilities, investors will closely monitor the developments and assess the long-term growth potential for the company.
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Generative AI Signals Show Promise
Morgan Stanley’s Keith Weiss predicts that generative AI signals will have a more qualitative impact rather than being purely quantitative. Despite potential frustrations, Weiss remains convinced that investor patience will ultimately pay off.
Microsoft’s Report: A Game-Changer for the Software Sector?
Guggenheim’s DiFucci recognizes the importance of Microsoft’s upcoming report, emphasizing that if the company outperforms expectations, it could have a significant positive impact on the entire software sector.
Positive Outlook for Microsoft’s AI Advantage
Citi Research’s Tyler Radke shares a similar upbeat sentiment ahead of Microsoft’s report. Radke agrees that AI could serve as a tailwind for the company, predicting a solid beat and raise in performance. He believes that Microsoft’s leadership position in generative AI can drive a durable multi-year reacceleration in both top-line and bottom-line growth.
Growth Expectations for Microsoft’s Key Segments
Analysts project a 10% growth in Microsoft’s productivity and business-processes unit, which includes Office. Additionally, the More Personal Computing segment, home to Windows and Xbox, is expected to see increased revenue by 18%.
Intelligent Cloud: A Revenue Boost for Microsoft
The FactSet consensus predicts an 18% growth in revenue from Microsoft’s Intelligent Cloud, which prominently features Azure—their leading cloud computing platform. Specifically, revenue from Azure itself is forecasted to rise nearly 28%, or about 27% in constant currency.
The Cost of Strong AI Positioning
While capitalizing on the trend of AI may bring significant benefits, there is a flip side. Companies that position themselves well in the AI landscape often need to invest substantial amounts of money to support their initiatives. Morgan Stanley’s Weiss highlights that Microsoft’s investments in AI, along with the integration of Activision and accounting changes, may put pressure on gross margins. Nevertheless, Weiss believes Microsoft will maintain a gross margin of 68.2% for the fiscal year, representing a slight decrease of 70 basis points from the previous year.
