Microsoft earnings were solid -and here's why they're primed to get even better

MW Microsoft earnings were solid -and here's why they're primed to get even better

By Emily Bary

Azure hasn't had quite enough capacity to meet booming AI demand

Microsoft Corp.'s earnings were "solid in so many ways," in the view of Melius Research analyst Ben Reitzes.

And they're poised to get a lot better for a number of reasons, he argued in a note Friday. For one, the company's Azure cloud-computing business hasn't had quite enough capacity to meet booming artificial-intelligence demand. Additionally, the company has only just begun to recognize financial benefits from its Copilot AI software features.

Microsoft $(MSFT)$ grew the Azure business at a 31% clip last quarter, and AI contributed 7% to that growth - up from 6% of AI contributions in the December quarter. And given capacity constraints, the contributions Microsoft just posted "could have been even better," Reitzes wrote.

"This growth backs the 'AI Gold Rush' we are seeing with staggering [capital-expenditure] figures and spending outlooks from the first big three clouds that have reported this week," he wrote. "Microsoft seems to have an edge right now, growing the fastest on a huge revenue base - working through various constraints pretty darn well."

See also: Everything to know about Microsoft earnings

Reitzes also highlighted the company's potential from its Copilot offerings that make various software products more useful with the help of AI.

"[Y]ou can't help thinking about what happens when Copilot actually starts to contribute in 2025," he wrote. Yes, there's the prospect of pricing benefits, but Reitzes sees arguably a greater opportunity for Microsoft in becoming an interface necessary for outside AI assistants as well.

He rates the stock as a buy with a $475 target price.

Bernstein's Mark Moerdler came out of Microsoft's earnings call with the impression that AI is becoming core to the company's business.

"One needs to remember that the world is in the early days of [the] generative-AI innovation cycle and that Microsoft has positioned itself at the center," he wrote. "The company is uniquely positioned having built out the most complete AI tech stack, AI tools and AI supercomputing capacity to help drive Azure AI."

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Moerdler was encouraged by more than just Microsoft's numbers. "[W]hat really shined through was management's level of enthusiasm about the business and the future of the business."

He rates the stock at outperform with a fresh target of $489, up from $465 before the report.

Evercore ISI's Kirk Materne called Microsoft a "supertanker" in the realm of AI and the cloud.

"We believe [Microsoft] remains in a very strong position heading into the remainder of [calendar-year 2024] as these results were delivered despite some [small-business] headwinds and capacity constraints for AI services," he wrote. Materne thinks Copilot for Office 365 will provide a more material boost to average revenue per user in the second half of the year, while "Azure remains in a strong position to continue to gain share."

He has an outperform rating and a $485 target price on the stock, up from $475 previously.

Microsoft shares ended 1.8% higher in Friday trading.

-Emily Bary

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April 26, 2024 17:28 ET (21:28 GMT)

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