Microsoft earnings: Azure growth, AI spending key as big tech wavers

Updated at 11:18 AM EDT

Microsoft shares slipped lower in early Tuesday trading ahead of its fourth quarter earnings, expected after the closing bell, with investors looking for the tech giant to lead the way in monetizing the trillions of investment dollars currently pouring into AI-related technologies.

Microsoft ( MSFT ) , which stole a march on its rivals last year through an early investment in ChatGPT creator OpenAI, has kept its nose in front of the pack on both AI investment and client adoption through its Azure cloud division and its Copilot assistant in Windows 365.

That lead is likely to be played out again in today's earnings report, which is likely to show robust cloud-services growth and a big boost to its overall group sales as it accelerates the AI-monetization cycle across a host of its client-facing platforms.

Analysts expect Microsoft to post bottom-line earnings of $2.93 per share for the three months ended in June, a 9% increase from the year-earlier quarter.

On the revenue side, the group is likely to see gains of around 15%, with a top-line tally of $64.4 billion, paced by a 30% growth rate for its flagship Azure cloud services.

Microsoft said earlier this year that AI infusions added around 7 percentage points to the revenue growth of Azure as it leveraged gains in both software-as-a-service sales as well as new infrastructure projects targeted to develop generative-AI technologies.

"The most important metric will be Azure growth with [Wall Street’s] bogey of 30%," said Wedbush analyst Dan Ives. He says that figure is "beatable ... given the high level of deal activity during the quarter from core Microsoft enterprise customers on the cloud."

Microsoft's 'iPhone Moment'?

"We strongly view this as Microsoft's 'iPhone Moment,' with AI set to change the cloud growth trajectory in the next few years," he added.

Piper Sandler analyst Brent Bracelin, who took his price target $20 higher to $485 per share in a note published last week, sees cloud gains as the key driver for Microsoft's near-term revenue growth.

Microsoft, Bracelin argues, needed 13 years and more than $176 billion in capital spending to get its cloud revenue past the $100 billion mark.

"The next $100 billion in cloud revenue could be added in just three years, compressing critical data center investments required to support a potential doubling of Microsoft Cloud revenue to $200 billion-plus exiting the 2026 fiscal year," Bracelin said.

Related: Microsoft's goal this week: Reassure Wall St.

Microsoft told investors in April that fourth-quarter spending would increase "materially ... driven by cloud and AI infrastructure investments," and would rise again in the 2025 financial year at a rate tied to "demand signals and adoption of our services."

Spending this financial year is likely to hit $45 billion, a 60% increase from 2023, and rise to as much as $53 billion in the coming financial year.

"The reason why [capital spending] is so important is two-fold," said Deepwater Asset Management analyst Gene Munster.

"First, it’s a barometer to how much big tech believes in AI," he said. "And second, it’s a leading indicator to how well the AI-hardware companies will perform over the next 2 years."

Spend it to make it

Bracelin, however, thinks investors shouldn't be spooked by the expanding spending commitment in a sector that is seeing such rapid and game-changing technological changes.

"Growth investors should look beyond near-term fears of an AI overbuild with the lens of a broader cloud transformation still underway that could help sustain double-digit top-line and bottom-line growth through 2030," he said.

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CFRA analyst Angelo Zino is equally bullish on Microsoft's ability to monetize the AI investment wave, given the adoption rate of its Copilot assistant, its OpenAI investment and the boost that ChatGPT is providing to its Bing search engine.

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Microsoft is also ramping up production of so-called small language models, AI datasets that perform simpler tasks and cost significantly less than the more common large language models.

"We see many diverse ways that Microsoft can monetize the explosion of generative AI, driving considerable upside potential to our/[Wall Street] consensus views looking ahead," said Zino.

"We believe that Microsoft will reap greater scale efficiencies through cloud adoption and, despite AI investments, we see Microsoft sustaining elevated margins," he added.

Microsoft shares were marked 1% lower in early trading to change hands at $422.77 each, a move that would peg the stock's year-to-date gain at around 13%.

However, the stock has fallen around 6.6% so far this month, pacing a collective 2.3% pullback for the so-called Magnificent 7, as investors continue rotate into smaller cap and domestically focused companies in advance of Federal Reserve rate cuts.

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