TLDR:
- Microsoft shares fell up to 5% after worse-than-expected quarterly revenue guidance.
- Investors are optimistic about AI investments’ potential in Azure cloud and Office software.
- AI investment leads to increased capital expenditures impacting cloud gross margin.
- The expectation for gradual growth in AI services impact; Copilot assistant pricing to come into effect.
- Analysts are cautiously optimistic about Microsoft’s AI leadership and future prospects.
Microsoft shares experienced a decline of up to 5% on Wednesday after the tech giant disclosed quarterly revenue guidance that fell short of expectations. The company’s recent focus on artificial intelligence (AI) investments has sparked discussions among analysts regarding the potential timing of returns.
The AI domain holds promising opportunities for Microsoft, particularly for its Azure public cloud and the market-leading Office productivity software. To fully embrace the potential of AI, Microsoft has been bolstering its capital expenditures, setting up the necessary infrastructure to offer AI services to external developers, and integrating assistant capabilities into applications like Word and Outlook. However, these investments have impacted Microsoft’s cloud gross margin.
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One notable initiative is the Copilot assistant for Microsoft 365 applications, expected to cost users an additional $30 per person per month. The exact commencement date for this charge remains undisclosed. Amy Hood, Microsoft’s finance chief, emphasized that “growth from AI services would be gradual,” with the impact anticipated mainly in the second half of the current fiscal year ending in June 2024.
Notably, some investors may need to recalibrate their revenue expectations in response to Hood’s comments, according to JPMorgan analysts, led by Mark Murphy. Meanwhile, UBS analysts, led by Karl Keirstead, pointed out that “the messaging on Copilot was more about tempering rather than inflating expectations.”
The advent of generative AI has captured the attention of the public, with the ChatGPT chatbot from startup OpenAI being one prominent example. Powered by Microsoft’s Azure platform, generative AI accepts human input and automatically generates content in response. This development has prompted companies like Atlassian to hasten the incorporation of such generative features into their products. However, delays in Microsoft’s crucial Office suite release could result in “missing out on a clear growth opportunity.”
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Despite the anticipation that the clear growth might not materialize until 2023, Stifel analysts, led by Brad Reback, express optimism, stating that “Microsoft is well positioned to take share across its numerous operating segments in the coming years.” Similarly, Raymond James’ analysts, Andrew Marok, and Mauricio Munoz hold a favorable outlook with the equivalent of a buy rating on Microsoft shares, emphasizing “MSFT’s position as an AI leader remains unblemished by today’s report.”
During the call with analysts, Microsoft CEO Satya Nadella confidently asserted the company’s leadership in new AI workloads within the cloud. He said that when it comes to new AI workloads in the cloud, “Microsoft is in the lead.”
In summary, Microsoft’s recent earnings report has prompted mixed reactions from investors and analysts alike. While concerns linger over the delayed impact of AI investments, the company’s strategic efforts in the AI domain are poised to strengthen its position in cloud services and productivity software. As Microsoft continues its AI-driven journey, it strives to strike a balance between meeting customer demands and optimizing operational costs.
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