Microsoft (MSFT.O) is anticipated to announce a 15.8% increase in quarterly revenue, marking its strongest growth in almost two years. This surge is attributed to the growing adoption of its products integrated with generative AI, which is driving demand for its cloud services.
With its early advantage in artificial intelligence, Microsoft is poised to solidify its position as the largest company by market value this year. The software giant claimed the top rank on Friday, boasting a valuation of $3 trillion, edging out Apple (AAPL.O), which had held the title of the most valuable company since 2011, by a narrow margin.
The outcomes expected on Tuesday from Microsoft, which has pledged over $10 billion in the development of generative AI pioneer OpenAI, including the creator of ChatGPT, will establish the outlook for AI expectations this year. Investors injected billions of dollars into the technology throughout 2023. Analysts suggest that any immediate impact on companies’ revenues will likely remain modest in the coming months. Nonetheless, Wall Street will closely monitor these investments to gauge if they are beginning to yield returns.
Morgan Stanley analyst Keith Weiss highlighted the rise of Gen AI as the primary focus for chief information officers, noting that Microsoft holds a distinct advantage. The majority of CIOs anticipate integrating a Microsoft AI product within the next year. In the past three months, Microsoft has extensively introduced its primary AI solution, “Copilot,” priced at $30 per month for Microsoft 365 users. Copilot aids in drafting emails, creating presentations, and summarizing meeting discussions.
Jefferies analyst Brent Thill emphasized that the growth of Azure, Microsoft’s cloud platform, is expected to be further fueled by increased contributions from AI services. Thill noted that despite any potential effects from developments at OpenAI, Azure’s AI sector is projected to maintain its robust performance in the second quarter.
Microsoft’s cloud business is experiencing accelerated growth as customers invest in computing power in anticipation of utilizing its AI offerings. Consequently, Azure is gaining market share against competitors such as Amazon’s AWS and Alphabet’s Google Cloud.
In the second quarter ending on December 31, Microsoft forecasted a 26% to 27% growth for Azure, a sentiment echoed by analysts at Visible Alpha who anticipate a 27.7% expansion.
RBC Capital Markets analyst Rishi Jaluria cautioned against prematurely factoring in revenue contributions from GenAI before 2025 for any software company apart from Microsoft.
Microsoft anticipates that its gross margin for the cloud business in the December quarter will remain relatively stable compared to the previous year, despite increased spending to enhance its AI infrastructure to meet rising demand. Operating expenses for the second quarter are projected to see the most significant surge in five quarters, according to LSEG.
The company foresees a resurgence in the personal computers market, driving revenue growth in its Windows and devices business to the highest level in four years.
In its Windows-based business segment, which now includes the recent acquisition of gaming firm Activision, Microsoft predicts second-quarter sales growth of approximately 16% to 19%. Last week, Microsoft announced a reduction of 1,900 employees from Activision Blizzard and Xbox, constituting about 8% of the overall Microsoft Gaming division.
Microsoft’s shares surged by 57% last year, contributing to a broader rally in tech stocks such as Alphabet and Nvidia, and consequently bolstering a 24% increase in the S&P 500 in 2023.
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