Following a strong earnings report that highlighted significant growth in its cloud business, Microsoft is expected to avoid a cash-burning scenario despite ramping up its AI investments. The company's stock surged nearly 15% in early Thursday trading.
Microsoft has finally convinced Wall Street that it is striking the right balance with artificial intelligence, which is translating into historic stock gains. The company had been fending off criticism of its AI spending, particularly when its cloud growth was constrained. However, with the latest earnings report showing accelerated cloud performance, investors are now warming to the Microsoft story. Additionally, management assured that heavy AI investment this fiscal year is not expected to push the company into negative free cash flow territory.
As a result, Microsoft shares are on track for their best single-day performance in nearly 18 years. Shortly after the opening bell on Thursday, shares were up 14.6%, positioning them for the best day since October 13, 2008, when they rose 18.6%. According to Dow Jones Market Data, the stock is also poised for its best-ever post-earnings day performance.
D.A. Davidson analyst Gil Luria wrote in a Thursday note that Microsoft's "very strong" results "should not only change the narrative for Microsoft but also signal that the AI buildout is in responsible hands." He referred to the software giant as "the adult in the room."
Meanwhile, Evercore ISI analyst Kirk Materne noted in a Thursday report that the "magnitude of the beat" in Azure's accelerating growth "exceeded even the most optimistic expectations." He specifically highlighted the company's fourth-quarter Azure growth rate of 43% and its target for 45% constant-currency growth in the September quarter. Analysts tracked by FactSet had expected around 42% growth for the September quarter. He also pointed to the momentum of Microsoft 365 Copilot, with the company reporting that its AI assistant has surpassed 30 million paid seats. "Christmas came early for Microsoft shareholders," he wrote.
TD Cowen analyst Derrick Wood wrote in a Thursday note that the combination of a higher-than-expected Azure growth rate and a cautious capital expenditure outlook "is the best-case scenario for this stock." This balance resulted in a "just right" earnings report, which Wood believes should "support the stock's continued rally."
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