Microsoft Corp. is anticipating one of its most captivating earnings reports in recent memory, according to a Wolfe Research analyst. However, it appears that the current day’s events may soon pale in comparison.
There are several near-term concerns on the horizon for Microsoft (MSFT), making the tech giant’s fiscal fourth-quarter report, set to be released on Tuesday afternoon, all the more compelling. Investors are particularly interested in the company’s cloud trajectory given the slowdown in the industry. They are also looking for signs that Microsoft’s business is resilient.
Cloud Growth and Market Share
Wolfe Research’s Alex Zukin believes that Microsoft’s Azure cloud-computing business experienced constant-currency growth of 27.5% during the June quarter, surpassing the company’s projected growth rate of 26% to 27%. Anecdotal conversations hint at stabilizing demand trends and improvement in June, leading Zukin to suggest that Microsoft is gaining market share due to increased demand for artificial intelligence workloads.
Cowen & Co.’s Derrick Wood, on the other hand, predicts cloud growth in line with the company’s outlook. He does, however, recognize that there is potential for upside in AI demand.
Future Cloud Trends
Looking ahead, there is some uncertainty regarding cloud trends. Wood notes that continued pressure on the core cloud is likely to result in a deceleration of Azure growth in the September quarter, with estimates pointing to a 25% expansion in the business.
Zukin shares the same estimate but remains highly optimistic about Microsoft’s future due to their expanding AI efforts. He suggests that instead of Azure growth dropping to the mid-teens by the December quarter, there is potential for accelerating growth, reaching 30% by the end of the year.
Bright Future Ahead
Taking into account Microsoft’s recent announcements regarding AI offerings, including unexpectedly high price points for Office and Copilot tools, Zukin envisions a promising future for the company.
Microsoft’s Strategic Positioning in Generative AI
However, achieving this level of success requires significant investment. Wall Street will be closely watching Microsoft’s capital-expenditure forecast for the upcoming fiscal year. With astronomical costs associated with the development, hosting, and serving of AI products, investors are concerned about a potential increase in expenditure.
While the consensus expectation is for $32 billion in capital expenditures, representing 13.5% of estimated revenues, analysts believe that the forecast could potentially reach $35 billion to $40 billion, equating to 15% to 17% of revenue. In fact, some experts suggest that these numbers could be even higher, with investor expectations approaching $50 billion.
Despite these potential costs, Microsoft has been performing exceptionally well, with shares gaining 45% so far this year, outpacing the Dow Jones Industrial Average’s 6% increase.
Overall, Microsoft’s strategic positioning in generative AI has positioned them as a major player in the industry. As they continue to invest in this technology, their growth potential is significant and could solidify their position as a leader in the software industry.
