Microsoft investors eye AI growth in earnings report

Comparisons are drawn with Alphabet, whose increased spending did not immediately boost revenue, leading to a stock drop.
Microsoft

Microsoft investors are keenly awaiting Tuesday’s earnings report, focusing on whether the Azure cloud-computing business has shown sufficient growth to justify the massive investment in AI infrastructure. With Microsoft being a leader in monetising AI through its collaboration with ChatGPT creator OpenAI, Azure’s growth is expected to remain steady at around 31% from April to June, aligning with forecasts. However, investors are looking for a more significant boost from AI contributions in the fiscal fourth quarter, following its 7% contribution to Azure’s growth in the prior quarter.

Microsoft’s capital spending is projected to have surged by 53% year-over-year to $13.64 billion, up from $10.95 billion in the previous quarter. Concerns over high spending on data centres with short-term gains have affected the US stock market, particularly after Alphabet’s recent report of capital expenditures exceeding estimates and only modest revenue boosts from AI integrations, causing a selloff in major tech stocks. Analysts emphasise the importance of Microsoft’s ability to accelerate AI-related revenue growth to meet investor expectations and justify continued high capital expenditures.

The increased spending has enabled Microsoft to attract more enterprise clients by expanding its AI cloud services and introducing features like the 365 Copilot assistant for Word and Excel. Despite half of the Fortune 500 companies using the $30-per-month Copilot service, Microsoft still needs to disclose its revenue contribution. Analysts expect the impact of Copilot to be more evident in the latter half of 2024. The company’s strategic focus on enterprise AI applications positions it well to capitalise on its extensive client base.

Microsoft shares have risen about 13% this year, adding over $350 billion to its market value, though the stock has recently dipped by nearly 9% amid a tech selloff. The company is expected to report a 14.6% increase in overall revenue for the April-June period, a slowdown from the 17% growth in the previous quarter, primarily due to slower growth in its personal computing segment, which includes Windows and Xbox. The productivity segment, which houses Office apps, LinkedIn, and 365 Copilot, is anticipated to grow by about 10%.