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Microsoft Corp. is gearing up for one of its “most interesting” earnings reports in a while, a Wolfe Research analyst says, but he has a feeling the events of the present day could soon seem like small potatoes.
With several near-term issues up in the air for Microsoft
MSFT,
it’s of course worth paying attention to the tech giant’s fiscal fourth-quarter report, due out Tuesday afternoon. Namely, investors are curious about the company’s cloud trajectory, given an industry slowdown, but also indications that Microsoft’s business is proving resilient.
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Wolfe’s Alex Zukin thinks Microsoft may have notched 27.5% constant-currency growth within its Azure cloud-computing business during the June quarter, whereas the company’s outlook was for 26% to 27% growth. He cites “anecdotal conversations [that] suggested stabilizing core demand trends in May and improvement in June” and hints that Microsoft is winning market share thanks to demand for artificial-intelligence workloads.
Cowen & Co.’s Derrick Wood, meanwhile, expects cloud growth in line with the company’s outlook, though he acknowledges AI demand offers the potential for upside.
Then there’s the question of cloud trends going forward. Wood said in a recent note that “continued pressure on core cloud is likely to keep Azure growth decelerating” in the September quarter, with his estimates implying a 25% expansion in the business.
Zukin has the same estimate, but he’s highly upbeat looking beyond that thanks to the company’s growing AI efforts. “Instead of investors prepping for Azure growth dipping into the mid-teens by [the December quarter], we now see the potential for accelerating growth by [that quarter] to end the year at 30%,” he wrote.
In light of Microsoft’s recent announcements arounds its AI offerings, including price points for Office and Copilot tools that came in well above what analysts had been expecting, Zukin sees a bright future.
“With Street numbers likely going up, we believe the focus will turn from what is good enough, to how good can it be, as each month lays plain precisely how broad, how deep, and how financially impactful [Microsoft’s] strategic positioning around generative AI truly is,” he wrote.
A cloud slowdown might be the narrative of today, but AI could make Microsoft the “fastest growing mega-cap software company in the world,” he said.
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That said, you have to spend money to make money, which is why Wall Street will also be watching the company’s capital-expenditure forecast for the new fiscal year.
“Given the exorbitant costs associated with the development, hosting and serving of AI products, many investors are concerned about the potential for [fiscal 2024] commentary regarding a material increase,” Jefferies analyst Brent Thill wrote.
While the consensus expectation is for $32 billion in capital expenditures, representing 13.5% of estimated revenues, there’s a possibility that the forecast could fall in the neighborhood of $35 billion to $40 billion, amounting to 15% to 17% of revenue, he said.
Guggenheim’s John DiFucci suggests that number could be vastly higher still.
“Our investor discussions imply greater capex than reflected in sell-side numbers” for fiscal 2024, he wrote. “Feedback from the Guggenheim TMT desk suggests that investor expectations are approaching $50 billion.”
Read: A Microsoft in the making? Oracle’s cloud momentum is giving one analyst flashbacks.
Microsoft shares have gained 45% so far this year, as the Dow Jones Industrial Average
DJIA,
has risen 6%.
