Investors had their magnifying glasses out as Microsoft (MSFT) unveiled its fiscal fourth-quarter (Q4) financial results on July 30, showcasing impressive numbers that exceeded market expectations for revenue and earnings per share (EPS). The tech behemoth’s revenue soared to $64.73 billion, a 15% surge year-over-year, surpassing the Street’s prognostications of $64.39 billion. Furthermore, EPS escalated by 10% to $2.95, outstripping analysts’ forecasts of $2.93.
In the full year review, Microsoft’s annual revenue surpassed the $245 billion mark, showcasing a 15% growth year-over-year. Notably, revenue crossed $135 billion, a remarkable 23% uptick.
Despite these robust figures, Microsoft’s stock encountered a turbulent ride following the earnings disclosure. Initially dipping in after-hours trading, the stock staged a slight recovery but eventually closed nearly 1% lower on July 31.
Evaluating Market Sentiment
Investors’ enthusiasm was somewhat dampened by apprehensions surrounding the growth trajectory of Microsoft’s Intelligent Cloud division, encompassing Azure. Despite the division’s healthy revenue of $28.52 billion, representing a 19% surge year-over-year, it fell slightly short of analysts’ consensus pegged at $28.68 billion. Azure’s revenue growth clocked in at 29% during the quarter, missing the mark set at 31%, pointing to a slowdown compared to the preceding quarters.
Per contra, Google’s Cloud division showcased robust growth in the latest reported quarter, propelled by advancements in artificial intelligence (AI) initiatives. Google’s Cloud segment notched revenues exceeding the $10 billion milestone for the first time, with the year-over-year growth rate accelerating to 29%, up from 28% in Q1 2024 and 26% in Q4 2023.
Microsoft, along with tech peers like Amazon (AMZN) and Alphabet (GOOGL), grapples with substantial investments to expand AI infrastructure, impacting its Cloud business margins. The company’s strategic emphasis on scaling AI infrastructure mirrors the industry-wide trend, with management affirming the need for these investments to cater to mounting AI service demands.
Despite the expenditure, Microsoft foresees a moderate fiscal Q1 Azure revenue growth of 28% to 29% in constant currency, slightly beneath market expectations, exacerbated by capacity constraints challenging the uptake of AI-driven services and overall revenue growth.
Evaluating Investor Concerns
Though the deceleration in Microsoft’s Cloud segment growth stirred worries, glimpses of hope emerged. AI services emerged as a prominent contributor to Azure’s revenue uptick in the June quarter, boding well for the tech titan. Of the 29% growth in Azure and ancillary cloud services, 8% stemmed from AI services, showcasing a positive trend. The expansion of Azure’s market share, bolstered by AI applications, offers a ray of optimism.
With Azure AI boasting a clientele exceeding 60,000 customers, a near 60% year-over-year increase, and a continual uptick in average customer spend, the demand for Azure AI services remains robust. Despite capacity constraints, Microsoft’s efforts to expand infrastructure reflect a commitment to meet burgeoning demand, hinting at future revenue growth.
Microsoft’s management underscored the company’s success in securing market share across diverse segments, noting record commitments for its Cloud platform. Commercial bookings exceeded expectations, notching a 17% upswing, primarily propelled by growth in substantial contracts for Azure and Microsoft 365.
In essence, Microsoft’s strategic investments in Cloud and AI bode well for its sustained growth trajectory in the long run.
Wrap Up on Microsoft Stock
Microsoft emerges as a compelling investment avenue in the technology realm, boasting a diverse product portfolio, robust competitive positioning in the AI domain, and targeted investments. The company’s strong focus on the Cloud business situations it favorably, poised to leverage long-term trends such as generative AI and digital transformation. Microsoft Azure’s anticipated market share climb is underlined by escalating customer adoption of its platforms for AI solutions.
Another forte for Microsoft lies in its spectrum of AI accelerators, integrated with cutting-edge offerings from Nvidia (NVDA) and Advanced Micro Devices (AMD). The ubiquity of Azure OpenAI Service among Fortune 500 companies signifies its ascending influence in the corporate landscape. Microsoft’s global expansion of data centers across four continents aligns with its long-term growth strategy over the next decade and beyond.
With a commanding position in productivity software and upsurge in gaming revenue supplementing its financial performance, Microsoft’s growth trajectory appears steady. Analysts mirror this optimistic stance, with an overwhelming majority advocating a buy rating. Out of 38 analysts covering MSFT, 34 deem it a “strong buy,” three a “moderate buy,” and one a “hold,” culminating in a resounding consensus of “Strong Buy.”
The average price target for Microsoft stock stands at $501, hinting at a potential upside of roughly 17.4% from prevailing levels.