Earnings Report Preview | Analysts generally optimistic, will Microsoft's AI business bring surprises?

According to Zhitong Finance, Microsoft (MSFT.US) is set to announce its first-quarter earnings after the U.S. stock market closes on Wednesday. The market generally expects Microsoft to report earnings per share of $3.10 and revenue of $645.6 billion. The company will disclose market-focused news during the earnings conference call, possibly focusing on the growth of Azure cloud, advancements in generative artificial intelligence, and new investor metrics. This is Microsoft's first update of investor metrics in recent times, adjusting segment markets in its reporting practices. These changes should provide a clearer view of its Azure cloud business.

Analysts led by Mark Moerdler at Bernstein stated in an investor report, "This quarter's focus may be more on understanding the numbers rather than the numbers themselves. Management has re-segmented the business, adjusted products and services, making it harder for investors to easily understand performance. Fundamentally, nothing has changed except for the reporting—cloud computing, especially Azure, is a significant driver of growth, and Microsoft is the most likely candidate for success in Gen AI."

Seeking Alpha analyst Yuval Rotem pointed out that despite Microsoft being an early winner in the artificial intelligence revolution, its performance in 2024 has been lackluster, leading investors to be more cautious about the stock. A major issue is the high capital expenditure on artificial intelligence.

In a recent analysis report, Rotem highlighted significant growth in the Azure field. Rotem stated, "Since 2017, the compound annual growth rate of this segment market has been 21%, with operating profit margins increasing by 14 percentage points, close to 50%. With recent changes, growth in this area is expected to accelerate to over 30%, while profit margins will decrease."

Microsoft's productivity and business division grew at a compound annual growth rate of 14% during the same period. Meanwhile, the revenue compound annual growth rate of the personal computing division was 7%. Rotem noted that this slowdown in growth is related to the overall industry's gaming growth slowdown, with gaming being the largest component of this segment market.

Rotem added, "In my view, Microsoft has one of the widest moats in history, and future profits are expected to grow by around 15%, making it attractive to buy Microsoft stock at a P/E ratio of 30."

Microsoft continues to create new ways to profit from artificial intelligence. Next month, it will launch autonomous AI agents, allowing customers to build their own agents in Copilot Studio and Dynamics 365. These agents can work in sales, service, finance, and supply chain teams.

Seeking Alpha analyst Tangerine Tan Capital stated, "Currently, the market has already factored in that Microsoft's future growth rate will be lower than in the past, which is typical for most companies, but I believe Microsoft is in a special position to outperform the market. Microsoft has many opportunities to benefit from artificial intelligence, whether it's in Office products, gaining market share in search, cloud computing, or even AI agents performing daily tasks." Earlier this month, Microsoft relinquished its position as the world's second-largest company to NVIDIA (NVDA.US). For most of the second half of this year, Microsoft's performance has lagged behind the Nasdaq index, rising by about 5% since the end of April, while the tech-heavy Nasdaq index has risen by 18.3%.

At the same time, the company's late summer performance was affected by mixed results in the fourth quarter, including weak performance in its flagship cloud computing division and a significant increase in artificial intelligence spending, as the company aims to monetize its investments in new technologies over the next year and beyond.

Microsoft's spending is expected to increase by 36% this fiscal year compared to 2024, with the injection of artificial intelligence technology into its product suite potentially leading to revenue growth. This period of disparity has put pressure on the stock price and affected the sentiments of some investors in this bellwether stock.

Analysts have varying views on Microsoft, but overall are optimistic about the company's growth potential in the AI field. Previously, TD Cowen reiterated its buy rating on Microsoft stock, maintaining its target price of $495. The firm expects the results to potentially slightly exceed expectations. This forecast is based on ongoing quarter-over-quarter booking trends and continued data center capacity constraints, which are expected to impact Azure's growth. The bank's analysis shows that, calculated at a fixed exchange rate, Microsoft's cloud computing service Azure is likely to achieve around 33% growth. The commentary emphasizes that the ongoing constraints on data center capacity are a factor in this forecast.

In addition, TD Cowen also mentioned the adoption rate of Microsoft's AI platform Copilot, noting that while the adoption rate is gradually increasing, it is not expected to have a significant impact on growth in the short term. The analyst expects Microsoft's first-quarter performance to moderately increase, with the second-quarter outlook aligning with current expectations.

TD Cowen remains optimistic about Microsoft, with the company's stance based on stable demand and the strategic positioning of Microsoft's products and services, despite gradually adopting new products like Copilot.

Microsoft's performance, especially in the field of cloud computing, is often seen as an indicator of the overall health of the tech industry. In other recent news, Microsoft has made some progress. Microsoft has signed a 20-year power contract with Constellation Energy to restore the Three Mile Island nuclear power plant, aiming to provide carbon-free power to Microsoft's data centers. This move is in line with the company's AI expansion plans.

Citi has lowered Microsoft's target price to $497 due to lower-than-expected growth in its Azure business, but still maintains a buy rating. Loop Capital and Evercore ISI have respectively reiterated their buy and outperform ratings, citing strong growth trends and fundamentals. KeyBanc is confident in Microsoft's growth and has raised its target stock price to $505.

Microsoft's capital expenditure in the previous fiscal year increased significantly by 75% year-on-year to $55.7 billion, and is expected to further increase to $80 billion this year, primarily due to investments in artificial intelligence infrastructure. Piper Sandler expressed concerns about potential overbuilding in artificial intelligence and its impact on profit margins, noting that these concerns may be unfounded