Microsoft set for AI-powered revenue surge as stock pulls ahead
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[January 29, 2024] By
Yuvraj Malik
(Reuters) - Microsoft is expected to report a 15.8% jump in quarterly
revenue, its best growth in nearly two years, as rising adoption of its
products infused with generative AI fuels demand for its cloud services.
Thanks to its early lead in artificial intelligence, Microsoft is likely
to cement its lead as the biggest company by market value this year. The
software giant snagged the top spot on Friday, with a valuation of $3
trillion, toppling by a small margin Apple, the most valuable company
since 2011.
Results on Tuesday from Microsoft, which has committed to invest more
than $10 billion in generative AI posterchild and ChatGPT maker OpenAI,
will set the tone for expectations from AI this year, after investors
poured billions of dollars into the technology in 2023.
Any boost to companies' toplines will still be small for the next few
months, analysts have said. Nevertheless, Wall Street will watch closely
to see if these investments are starting to show returns.
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"Gen AI has emerged as the top priority for (chief information officers)
and Microsoft is uniquely well positioned, with the majority of CIOs
expecting to use a Microsoft AI product in the next 12 months," Morgan
Stanley analyst Keith Weiss said in a note dated Jan. 11.
The Windows-maker over the last three months has widely rolled out its
main AI tool - the $30-a-month "Copilot" for its Microsoft 365 service
that can draft emails, make presentations and collate meeting
highlights.
"We expect AI contribution to Azure growth to increase, with our checks
pointing to strong demand for Azure AI services," said Jefferies analyst
Brent Thill in a research note.
"It's worth highlighting that we expect the situation at OpenAI will
have a minimal impact, if any, on Azure's AI contribution in (the second
quarter)," he said.
Growth in Microsoft's cloud business is also picking up as customers buy
computing power in anticipation of using its AI services. This has
helped Azure win market share as it competes with Amazon.com's AWS and
Alphabet's Google Cloud.
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Microsoft apps are seen on the smartphone placed on the keyboard in
this illustration taken, July 26, 2021. REUTERS/Dado Ruvic/Illustration
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Microsoft forecast 26% to 27% growth for Azure in the second quarter
ended Dec. 31. Analysts from Visible Alpha expect Azure to grow
27.7%.
"It's too early to be modeling revenue contribution from GenAI
before 2025 for any software company not named Microsoft," said RBC
Capital Markets analyst Rishi Jaluria.
Microsoft said in October it expects its December-quarter gross
margin for the cloud business to be mostly flat from a year earlier
as it spends to expand its AI infrastructure to meet growing demand.
Second-quarter operating expenses are expected to surge the most in
five quarters, according to LSEG.
A recovery in the personal computers market is expected to lift
revenue growth in the company's Windows and devices business to the
most in four years.
For its Windows-based business segment, which includes its recent
acquisition of gaming firm Activision, the company forecast
second-quarter sales growth of about 16% to 19%. Last week,
Microsoft said it would let go of 1,900 employees at Activision
Blizzard and Xbox, representing about 8% of the overall Microsoft
Gaming division.
Microsoft's shares climbed 57% last year. Along with a rally in
other tech stocks, including Alphabet and Nvidia, Microsoft helped
fuel a 24% surge in the S&P 500 in 2023.
(Reporting by Yuvraj Malik in Bengaluru; Editing by Sayantani Ghosh
and Sriraj Kalluvila)
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