It's almost time for investors to learn more about Microsoft Corp.'s next phase of AI growth.
The tech giant became a model for artificial intelligence last year thanks to its investment in OpenAI, the creator of the popular chatbot ChatGPT. The AI revolution appears to be already helping Microsoft's MSFT,
Its cloud computing business Azure, which has seen better trends than Alphabet Inc's GOOG.
Google,
Google Cloud.
But while Microsoft appears to be winning AI workloads in the cloud, the stock's AI bull case extends far beyond that. The company has built AI into its software products using its Copilot technology, and began making that available to enterprise customers in November. Investors could start getting hints about the financial impacts when Microsoft posts its fiscal second-quarter results on Tuesday afternoon.
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“We continue to expect Copilot to impact revenue growth in a greater way [the second half of the calendar year]“But based on our expert discussions, the level of interest in Copilot is very high and the question is when, not if, adoption will start to ramp up in a more material way,” Evercore ISI analyst Kirk Materney wrote in a recent note.
John DiVucci, an analyst at Guggenheim, added that Wall Street was hoping for “possibly quantitative” indications of how Microsoft 365 Copilot would perform. But whether Microsoft's numbers highlight the impact is another story.
“[W]“We expect any indicator to be qualitative in nature as the office business benefits from other (more important) tailwinds, including a combination of broad price increases and renewals of previously discounted deals at a higher price,” DiFucci said.
He said he expects Microsoft management to provide similar qualitative messages about how OpenAI can help Azure. Thinking about the big picture, he added, the company will post a “strong” quarter in December and will provide guidance for the March quarter that is “at least in line” with expectations for its important Azure, Office and Windows businesses.
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Morgan Stanley's Keith Weiss echoed the prediction that generative AI signals will be more qualitative than quantitative, but he doesn't think this approach should warrant frustration.
“We remain convinced that investors’ patience will be rewarded,” he wrote.
Guggenheim's DeVucci added that the risks are high ahead of Microsoft's report: “If we are right and MSFT outperforms expectations, it will likely benefit the entire software sector.”
Citi Research's Tyler Radke was similarly optimistic ahead of the report's release, agreeing that AI could act as a tailwind.
“We expect a strong win and increase and believe IT budgets will improve, driven in part [generative AI] “Where MSFT is in a leadership position with multiple monetization vectors can lead to a permanent multi-year reacceleration in top/bottom income growth,” he wrote.
Analysts expect Microsoft to see 10% growth in its Productivity and Business Processes unit, which includes Office. The More Personal Computing segment, which includes Windows and Xbox, is expected to see a revenue increase of 18%.
The FactSet consensus also calls for 18% revenue growth from Intelligent Cloud, which includes Azure. Revenue from Azure itself is expected to rise approximately 28%, or about 27% in constant currency.
Of course, there is a flip side to AI being in a strong position: companies that position themselves well to capitalize on this trend will have to spend money to do so.
“Investments in artificial intelligence, the Activision integration, and overlapping accounting changes are expected to put pressure on gross margins,” wrote Morgan Stanley's Weiss, who believes the company will ultimately achieve a gross margin of 68.2% for the fiscal year, down 70 basis points on the year. Former financial. a year ago.
