AI falling short of expectations? Analysts say Microsoft must see "significant growth in the future" as it dares to expand capital expenditure.

Wallstreetcn
2024.02.01 11:34
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Azure's revenue is expected to maintain steady growth, as Microsoft has taken up the banner of monetizing AI.

Microsoft's latest quarterly earnings report is impressive, with revenue and cloud business income exceeding expectations. However, due to the high valuation, Microsoft failed to bring any surprises to the market, resulting in a decline in stock prices.

On January 31st, Microsoft's stock fell by 2.7%, marking a two-day consecutive decline to its lowest level since January 22nd. Despite this, Microsoft's stock price has still risen by 7.2% since the beginning of the year.

Some analysts pointed out that Microsoft's intelligent cloud business income grew by 18% YoY when calculated at a fixed exchange rate, which is the same growth rate as the previous quarter. The growth rate of Azure income, also calculated at a fixed exchange rate, remained the same. This disappointed some investors and led to a two-day consecutive decline in stock prices.

However, many Wall Street analysts are not concerned about this. Bernstein analyst Mark Moerdler told investors to focus on Microsoft's capital expenditure guidance. He stated that from Microsoft's investment plans in cloud computing and AI infrastructure, it can be seen that the company is optimistic about the revenue growth of its cloud business, especially the Azure platform. This indicates that Microsoft believes in "significant revenue growth in the future."

Moerdler wrote in his report, "We believe this indicates that management has significant expectations for cloud revenue growth." He believes that this shows Microsoft has taken up the banner of AI development, and Azure may become the world's largest and most important cloud service provider in the future.

Morgan Stanley analyst Mark Murphy also maintained a "outperform" rating for Microsoft after the earnings report was released, and raised the target price from $385 to $440. Murphy stated that Microsoft's "solid" quarterly performance and AI-related earnings reflect "continued execution and a stable environment."

Can Microsoft's future be seen from its investment in AI?

Microsoft emphasized the contribution of artificial intelligence in its earnings report. The quarterly revenue of Microsoft's intelligent cloud business reached $25.8 billion, surpassing analysts' expectations of $25.3 billion by 20%. The revenue from Azure and other cloud services grew by 30%.

During the conference call, Microsoft CEO Satya Nadella stated that Microsoft currently has 53,000 Azure AI customers, one-third of which joined last year. The company's CFO, Amy Hood, also stated that 6% of the growth in Azure and other cloud services is related to artificial intelligence. Microsoft continues to invest in AI, with a current investment of up to $13 billion in OpenAI, as mentioned by Wall Street News.

Brett Iversen, Vice President of Investor Relations at Microsoft, stated during a conference call after the earnings report that Microsoft is enhancing its AI infrastructure capabilities through investments in areas such as data centers and servers. However, he mentioned that the growing demand for cloud services and cost control in other areas have not yet impacted profit margins.

Amy Hood, Chief Financial Officer of Microsoft, expects a "significant increase" in the company's capital expenditure. She also added that the company is shifting towards an "AI-first" workforce, rather than hiring a large number of employees in the technology department.

Moerdle believes that Microsoft's investment in AI indicates that its software and cloud services will help the company win in the AI competition, forming a "strong business feedback loop," which is their unique advantage. Therefore, the stock rating is set as "overweight," with a target price raised from $406 to $465:

For example, Microsoft can learn and innovate through multiple Copilot tools, and then apply these experiences and knowledge to its Azure business, driving technological progress and service improvements.

By collecting data and feedback from practical applications, understanding how customers use AI technology and what tools they need to support their innovation and business execution. Microsoft then applies these insights and learning outcomes to the development and optimization of its Azure services, further enhancing the capabilities of its products and services.

Kirk Materne, an analyst at Evercore ISI, reiterated that Copilot is expected to have a greater impact on Microsoft's revenue growth in the second half of 2024:

"Based on our expert discussions, there is a high level of interest in Copilot. The question is when, rather than if, adoption rates will begin to grow in a more substantial way."

Tyler Radke from Citigroup Research also believes that as customer IT spending budgets improve, the monetization of AI can drive continuous acceleration of Microsoft's revenue and profit growth in the coming years.

Dan Ives, a prominent technology analyst at Wedbush Securities, bluntly stated that Microsoft and NVIDIA have become the "two torchbearers" of the AI revolution sweeping the market. The shift of Microsoft's core enterprise product customers to cloud services has surged at the end of last year: In short, we believe that (entering AI) is Microsoft's 'iPhone moment', as artificial intelligence will change the trajectory of the company's cloud growth in the coming years, even making the optimistic performance guidance given by the management appear rather conservative.