Microsoft will report its Q2 FY24 earnings after the US markets close on 30 January, which will be the morning of 31 January in the Asia-Pacific time zone.
Previous Quarter Review
The company surpassed expectations in the last quarter (FY July- June), with net revenues increasing 13% y-o-y to $56.5 billion and a net profit growth of 27% to $22.29 billion. Notably, Intelligent Cloud revenue showed strong performance, growing 19% to $24.3 billion, accounting for 43% of the overall revenue. Azure and other cloud services revenue increased by 28% (calculated at a fixed exchange rate).
Q2 Fiscal Year 24 Earnings Outlook
Analysts expect Microsoft’s revenues to come in at $61.107 billion. Adjusted earnings are likely to come in at about $2.778 per share, according to Bloomberg's unanimous expectations.
Microsoft's management anticipates Azure's growth to reach 26% to 27% in the second quarter. The company continued its upward trajectory in January 2024, surpassing Apple to become the world's most valuable company with a market capitalization close to $2.9 trillion. This reflects investor confidence in the future development of the artificial intelligence field. Recently, Microsoft announced the launch of Copilot Pro for the M365 Family and Personal edition, priced at $20 per month. This means individual users can now access the latest OpenAI models. Additionally, Copilot for the enterprise has eliminated the minimum purchase requirement for corporate users, indicating potential growth in small and medium-sized enterprise customers.
Microsoft Could Indicate End to Cost Rationalization
Microsoft commentary could point to a potential end to client cost optimization that's plagued growth for its Azure cloud infrastructure business for almost two years, with a likely rebound in the next one or two quarters. Azure's sales gain may be about 29% in constant currency, vs. consensus of 27%, with AI-related workloads accounting for 4-5% of the boost.
Activision might add roughly $1.6 billion in sales to 2Q results, as the deal closed Oct. 13. For 2024, the total contribution could be $5-$6 billion. Activision may pare adjusted operating margin 200-300 bps sequentially, with the impact lessening over the year. Ex-Activision, 2Q organic sales constant-currency growth may be about 12%-13%, up slightly from 1Q.
Beyond Azure, we don't expect any material AI contribution from products such as Office Copilots or Bing.
Microsoft's Market Cap Surpassing Apple Is a Matter of Time
The potential growth of M365 users and Azure services in 2024 may propel Microsoft's market capitalization beyond $3 trillion, making it a matter of time. Microsoft's leadership in the AI field may secure its position as the global market leader. Meanwhile, its competitor Apple faces challenges with declining iPhone 15 sales and sluggish adoption of Vision Pro.
Currently, it seems Apple may need to find new growth points to support its stock price, but due to its relatively subdued noise in the AI field, a turnaround could be difficult to foresee, leading to some rating downgrades by investment banks. Currently, Microsoft's P/E ratio has reached 37 times, higher than the five-year average of 30 times and the ten-year average of 24 times. In the short term, the high P/E ratio reflects optimistic expectations of investors for the future.
However, some potential risks are being overlooked, including:
Downward pressure on macro fundamentals, with some data signaling a recession warning, such as non-manufacturing PMI on the verge of contraction;
The slowdown of corporate digital transformation in a downturn, potentially affecting Azure's growth;
Slowed spending by residents and small businesses in a high-interest-rate environment, leading to a slowdown in M365 sales growth;
Increased competition in the AI field, potentially further weakening Microsoft's operating system share;
Challenges in supporting the current high valuation levels due to growth pressures in the PC business.
