After the U.S. stock market on Thursday, April 25, technology giant Microsoft, which leads the hot track for its precise bet on generative AI, released its financial report for the third quarter of fiscal 2024 (that is, the first quarter of 2024), which will cover the first full quarter sales of Microsoft's 365 Copilot generative AI assistant after its launch to commercial customers in November last year.
The AI-driven growth led to Microsoft's quarterly earnings report key indicators and various businesses exceeding expectations, among which the overall Microsoft cloud revenue increased by 23% year-on-year to $35.1 billion, intelligent cloud revenue increased by 21% to $26.7 billion, and Azure revenue accelerated quarter-on-quarter, causing the stock price to rise more than 5% after hours.
Microsoft, a component of the Dow Jones, closed down 2.5% on Thursday, halting a three-day winning streak and off a one-week high. Its market capitalization fell off $3 trillion, but it still surpassed Apple to remain the most valuable company in the U.S. stock market, mainly due to the market's expectation of strong growth in AI-driven cloud revenue.
Microsoft's stock price has risen 6% since the beginning of this year, basically the same as the S&P market's year-to-date gains, and has risen 35% in the past 12 months. The analyst consensus rating is a "strong buy", with a total of 32 "buy" ratings, 1 "hold" rating, and only 1 "sell" recommendation, and the average price target on Wall Street is $477.41, representing nearly 17% potential upside.
AI assisted Microsoft's Q1 performance to exceed expectations, with profits increasing by 20% year-on-year and a slight increase month-on-month
According to the financial report, Microsoft's total revenue in the first quarter of 2024 was $61.86 billion, higher than the market expectation of $60.87 billion, equivalent to a year-on-year increase of 17%, exceeding the company's previous official guidance of 14.5%.
Adjusted EPS was $2.94, above the consensus of $2.82 and up 20% from $2.45 in the year-ago quarter. Net profit was $21.94 billion, up about 20% from $18.3 billion in the same period last year. Operating profit rose 23% to $27.6 billion.
Compared with the fourth quarter of last year, Microsoft's revenue fell quarter-on-quarter, when it increased by 17.6% to $62 billion, the best quarterly year-on-year growth rate in nearly two years since 2022, and the fifth consecutive quarter of record revenue driven by the AI tide. Profit edged up sequentially.
Previously, the market generally believed that Microsoft's revenue side will continue to be driven by the continued growth of the cloud service Azure with the help of AI demand. On the earnings side, it was boosted by stable revenue growth and improved operating leverage through cost control measures. The continued growth momentum of Microsoft's 365 product suite is also likely to drive growth in its monetization metric: average revenue per user.
Microsoft Chairman and CEO Nadella said that the quarter has been integrating the artificial intelligence technology of partner OpenAI into Microsoft's entire product line.
AI drove Azure cloud revenue growth by 31%, contributing 7 percentage points to cloud revenue growth
In terms of business, the Intelligent Cloud business unit, which includes Azure public cloud, Windows server, speech recognition software Nuance and GitHub, saw a 21% year-on-year increase in revenue to $26.7 billion in the first quarter, exceeding market expectations of $26.25 billion, higher than the company's guidance of about 18%, and also higher than the previous quarter's growth rate of 20.4%.
Among them, the revenue of Azure and other cloud services increased by 31%, higher than the market expectation of 28.6% growth, as well as the growth rate of 29% in the third quarter of last year and the growth rate of 30% in the fourth quarter of last year, indicating that AI is indeed driving the acceleration of cloud revenue growth.
It is worth noting that AI contributed 7 percentage points to Azure revenue this time, up from 6 percentage points in the fourth quarter of last year and 3 percentage points in the third quarter of last year.
Amy Hood, Microsoft's executive vice president and chief financial officer, said in a statement that strong execution by sales teams and partners drove Microsoft Cloud's revenue up 23% year-on-year to $35.1 billion, higher than market expectations of $33.93 billion, after rising 24% to $33.7 billion last quarter.
According to some analysts, Microsoft's cloud revenue grew sharply in the first quarter, surpassing Amazon AWS and Alphabet's Google Cloud.
Other lines of business also saw double-digit revenue growth, with Office commercial revenue, which includes the Copilot AI assistant, up 15%
Quarterly revenue from Microsoft's Productivity and Business-processes division, which includes Office software, rose 12% year-on-year to $19.6 billion, above expectations of $19.54 billion, after rising 13% to $19.25 billion in the previous quarter.
Revenue from Microsoft 365 Copilot AI tools is included in the Office business product line, which grew 15% in the quarter, resulting in a 13% increase in Office commercial products and cloud services revenue (12% in constant currency).
In addition, More Personal Computing, which includes Windows operating systems, Surface hardware, Xbox consoles, and newly acquired video game company Activision Blizzard, saw quarterly revenue rise 17% year-over-year to $15.6 billion, above market expectations of $15.07 billion, but down from a quarter-over-quarter increase of about 19% to $16.89 billion.
Windows revenue increased 11%, including an 11% increase in Windows OEM revenue and a 13% increase in Windows commercial products and cloud services revenue (12% in constant currency). equipment revenue decreased by 17% year-on-year; Xbox content and services revenue grew by a significant 62 percent, and search and news advertising revenue, excluding acquisition costs, increased by 12 percent.
Why does it matter?
Microsoft's earnings report is notable not only because of its huge position in the technology world, but also because of its early leadership in the field of artificial intelligence, which has made investors pay attention to whether the huge AI investments of Microsoft and similar companies have shown signs of sustained returns.
Given that the Microsoft 365 Copilot AI chatbot, which pays an additional $30 per user per month, has been in operation for at least a full quarter, Microsoft's earnings report will be a key barometer of AI's monetization potential and ability to drive growth:
"Microsoft has invested $13 billion in OpenAI, the parent company behind ChatGPT, the hottest generative artificial intelligence, and is the leader of the AI track, and its performance will not only determine the performance of the overall software industry this earnings season, but also set the tone for AI adoption and development expectations this year. ”
And after trading on Wednesday, Meta, one of the AI leaders, reported a "bad report", which has rekindled investors' panic about technology stocks. Wall Street has mentioned that Meta's plunge has raised questions about the profitability of AI and concerns about the overall technology sector.
During the earnings call, analysts will be closely focused on the growth of Azure's cloud division, particularly the customer engagement rate, subscription size, use case outlook, and guidance for the next few quarters of Microsoft's AI efforts to monetize AI across consumer and enterprise customers in recent months, as well as guidance for the next few quarters.
Investors will also be concerned about the cost pressures of tens of billions of dollars invested in AI. In order to develop AI services, Meta yesterday sharply raised its capital expenditure forecast for 2024 and predicted that spending will continue to grow in the coming years. As a result, the market is paying attention to Microsoft's comments, which have already called for a significant quarter-by-quarter increase in capital spending to meet the demand for AI infrastructure.
What do you think of Wall Street?
The increase in demand for artificial intelligence has made Wall Street optimistic about Microsoft, with major investment banks raising their price targets ahead of earnings reports, and revenue growth from the Azure platform and other cloud services likely to stabilize at around 30% for several consecutive quarters, but there are also concerns that Microsoft's revenue growth will slow for the rest of the year.
Among bullish analysts, Wells Fargo called Microsoft "the best way to get into the market and invest in AI." Piper Sandler called Microsoft an "AI superstar" and believes it is in the "early stages of monetizing AI's first-mover advantage." Goldman Sachs also said that Microsoft is "uniquely positioned to expand generative AI revenues without structural changes to its earnings."
Daniel Ives, a well-known technology analyst at brokerage Wedbush, optimistically reiterated that the dual acceleration of generative AI adoption and Copilot activity will prompt Microsoft to close more Azure cloud deals, driving the company to achieve a "cross-board rally":
"In the next six to 12 months, AI use cases are likely to explode across the enterprise landscape. We see this as Microsoft's 'iPhone moment', and we are confident that AI will change Microsoft's cloud growth trajectory for years to come." ”
The latest AI developments and regulatory risks
Microsoft this week unveiled Phi-3-mini, a mini AI model for small businesses. Brokerage firm Guggenheim has warned that Microsoft has the most exposure to small and medium-sized enterprises and consumers compared to its peers, and these users are already showing signs of weak demand.
Microsoft also announced on Tuesday that it had signed a five-year, $1.1 billion deal with Coca-Cola to use the software giant's Azure cloud services and artificial intelligence technology to accelerate Coca-Cola's system-wide AI transformation, also helping to bolster Microsoft's AI ambitions.
Some analysts have pointed out that Microsoft has always chosen to expand into the field of artificial intelligence through strategic partnerships and investments, rather than outright acquisitions, in part to avoid the regulatory hurdles encountered in acquiring Activision Blizzard.
Recently, Microsoft, which is committed to advancing AI and cloud infrastructure globally, has invested in other AI startups such as Figure AI, Mistral AI, and Vengo AI, announcing plans to invest $2.9 billion in AI and cloud infrastructure in Japan, after committing $3.2 billion in the UK, $3.5 billion in Germany, and $2.1 billion in Spain.
Microsoft has also invested billions of dollars in AI startup Anthropic, $1.5 billion in UAE-based AI company G42, and hired DeepMind AI and Inflection AI co-founder Mustafa Suleyman as CEO of Microsoft's AI division in March this year, with other key Inflection AI executives and multiple employees also joining Microsoft.
However, whether investing in AI startups is an acquisition is putting big tech giants like Microsoft under regulatory scrutiny. OpenAI, Microsoft's largest AI investment, just last week avoided the opening of an antitrust investigation into the relationship between the two by the European Union, while the UK's Competition and Markets Authority, the US Department of Justice and the Federal Trade Commission are still considering whether to launch an investigation.
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