Microsoft's AI Expectations

There has been a great deal of discussion on Wall Street about Microsoft's potential as a long-term leader in the artificial intelligence (AI) industry. However, the question of when generative AI will have a significant impact on the company's financial performance remains a topic of substantial debate.

Today, Microsoft (ticker: MSFT) is set to release its results for the fiscal first quarter ended September 30th. Investors are eagerly anticipating insights into this matter, although their expectations may be unmet.

In 2023 alone, Microsoft shares have surged by an impressive 36%, largely driven by investor enthusiasm for the company's substantial investment in OpenAI, its integration of AI software into Bing, and the implementation of AI Copilot across its software lineup.

Despite this positive outlook, investors have belatedly realized that the development of AI software tools requires substantial initial investment in computing resources, thereby exerting pressure on profit margins.

Resultantly, the stock has declined by 7% since the last earnings report in late July, with investors expressing disappointment over the absence of a substantial AI-driven boost. It is important to note that it takes time for new software to reach customers, and earlier this year, investor expectations surpassed reality.

However, one area where Microsoft can confidently provide answers is in the cloud computing domain. Investors will keenly analyze both present and projected growth for Azure, Microsoft's cloud computing business. In recent quarters, Azure's growth has slowed as some cloud customers sought ways to enhance the efficiency of their cloud expenditures.

Microsoft's Azure Growth Projections

Microsoft's Azure cloud computing platform is set to experience a slight dip in growth during the September quarter, compared to the previous quarter. The tech giant's guidance suggests a growth range of 25% to 26%, down from the 26% growth achieved in the June quarter. However, Microsoft is confident that its focus on artificial intelligence (AI) will provide a two percentage point boost to Azure's growth in the September quarter, improving upon the one point uplift seen in the June quarter.

Investor Expectations and Analyst Projections

Derrick Wood, an analyst from Cowen, reveals that the most common question he receives about Microsoft pertains to how the company will guide Azure's growth for the December quarter. Wood believes that investor expectations align with a growth range of 25% to 26%, with an additional three points of growth attributed to AI. Any deviation from these figures could potentially impact Microsoft's stock, but Wood expects a moderate guidance.

John DiFucci, an analyst at Guggenheim, does not anticipate substantial movement in Microsoft shares during this quarter. In his analysis note, DiFucci highlights that this quarter's results will not provide a definitive indication of Microsoft's progress in GenAI, which is seen as a key driver for the company's future trajectory. Instead, DiFucci suggests focusing on the potential upside for Office and Windows in the September quarter. He notes that consensus estimates for Windows reflect a conservative outlook, assuming weaker PC shipments than expected. However, DiFucci does acknowledge some risk for Azure's business.

Looking Ahead to the December Quarter

DiFucci believes that the December quarter results will offer a clearer indication of Microsoft's future direction. This is primarily due to the two months of general availability of Copilot software for Microsoft 365, scheduled to launch on November 1st. Microsoft 365 is the company's suite of productivity applications, including popular tools like Word, Excel, and PowerPoint. The introduction of the AI-powered Copilot software is expected to have a significant impact on the December quarter performance, making it a crucial period for assessing Microsoft's path forward.

In conclusion, while the September quarter is not anticipated to trigger significant movement in Microsoft shares, the focus on AI-driven developments and the upcoming launch of Copilot software present exciting prospects for the future growth of Azure and Microsoft as a whole.

Microsoft's Quarterly Performance

Revenue Breakdown by Segments

Intelligent Cloud

Productivity and Business Processes

More Personal Computing

Forecast for the December Quarter

Segment Revenue Projections

Analyst Focus and Considerations

Apart from artificial intelligence (AI) and the cloud, analysts will likely pay attention to the following areas:

Impact of Activision and Capital Allocation Plans

Outlook for PC Demand