Microsoft’s AI Journey: A Gradual Climb Towards Success
Microsoft is on the AI train, but it seems they’re not zooming ahead like Nvidia just yet. According to analyst Ben Reitzes from Melius Research, the last quarter might have been a bit of a breather for big tech companies like Microsoft. He sees it as a prelude to bigger things to come.
Even though Microsoft is doing well, it’s not all about AI for them right now. Reitzes thinks investors are waiting to see how much customers will spend on AI in the future. He hinted that Microsoft might not boast about its AI software, called Copilot, when it reports its earnings. It seems they’re managing expectations, as Reitzes suggests the revenue might not skyrocket just yet.
On the other hand, Kirk Materne from Evercore ISI is a bit more optimistic about Copilot’s future. He believes there’s a lot of interest in it and adoption will pick up pace soon. However, the real impact on revenue might not show up until later this year or even next year.
Another analyst, Brent Thill from Jefferies, agrees that Microsoft will make gains with AI, but it’ll take some time. He thinks the adoption will gradually pick up speed, starting in the second half of this year and then really taking off next year.
Microsoft’s AI strategy has different parts. While Copilot might not make a big splash immediately, analysts are more hopeful about how AI can boost Microsoft’s Azure cloud business. In the past, AI services contributed a decent chunk to Azure’s growth, and Thill thinks investors might be expecting even more this time around.
Microsoft had a strong outlook for Azure growth in the last quarter, and it’s expected to be similar this time. Analysts are eyeing a 28.5% growth rate, but Thill thinks investors might be hoping for even more, around 29% to 30%.
Overall, analysts expect Microsoft to report adjusted earnings per share of $2.82, up from $2.45 last year. Revenue is expected to hit $60.9 billion, up from $52.9 billion. This could be good news not just for Microsoft, but for the software sector as a whole, which has been sluggish this year.
If Microsoft beats expectations, it could give the software sector a much-needed boost. However, analysts like John DiFucci from Guggenheim don’t expect a major acceleration in IT spending until the second half of the year.
Decoding the Microsoft AI Story
Microsoft is on its way to becoming an AI powerhouse, but it’s not an overnight journey. Analysts see the recent quarter as a warm-up before the real AI action begins. While Microsoft’s AI software, Copilot, might not steal the show just yet, there’s optimism about its future impact.
Analysts are divided on when Copilot will start making a significant revenue impact. Some think it’ll take a bit longer, while others see adoption picking up sooner. Regardless, there’s agreement that AI will play a crucial role in Microsoft’s future success.
One key area where AI is already making waves is in Microsoft’s Azure cloud-computing business. AI services have been boosting Azure’s growth, and investors are eagerly awaiting the next update. The expectation is that AI will continue to drive Azure’s expansion, although the exact extent remains to be seen.
The upcoming earnings report is highly anticipated, with analysts predicting growth in both earnings per share and total revenue. If Microsoft surpasses these expectations, it could lift not only its own stock but also the entire software sector.
However, analysts caution that significant acceleration in IT spending might not happen until later in the year. Despite this, the overall sentiment is positive about Microsoft’s AI journey and its potential to reshape the tech landscape.
The Goal of Microsoft
According to Melius Research analyst Ben Reitzes, Microsoft is benefiting from artificial intelligence, but not as much as Nvidia. Reitzes described the March quarter as a transitional period for many large tech companies, including Microsoft, before more significant quarters ahead.
Reitzes emphasized the importance for Microsoft of both surviving and advancing in the competitive landscape. He noted that investors will be keen to learn about future AI spending from customers.
Regarding Microsoft’s fiscal third-quarter results, Reitzes suggested that investors shouldn’t be surprised if revenue from Copilot, Microsoft’s AI software enhancements, is downplayed. This indicates that the company may be managing expectations for its AI revenue.
