Microsoft has an opportunity to refocus investors on something other than its disappointing cloud growth when it reports earnings on Wednesday afternoon.
There are two things potentially working in Microsoft’s favor this time, according to Jefferies analyst Brent Thill. For one, a “reset” in Azure expectations could help broaden investor attention beyond absolute Azure growth, because the cloud unit’s capacity constraints “are now well understood.”
And Microsoft now may be ready to demonstrate its artificial-intelligence momentum in a meaningful way elsewhere in its business. Wall Street once primarily looked to the cloud for signs of whether Microsoft’s hefty AI spending was paying off. Now, stock sentiment may depend on whether Microsoft can convince investors of its AI traction in software through its commentary on Microsoft 365 and Copilot.
The “durability” of Microsoft 365 — which includes various Office software offerings — has been a major factor weighing on Microsoft’s stock multiple, according to Thill. There’s been general concern about whether traditional software vendors will be able to hold their ground as artificial-intelligence tools proliferate. Even Microsoft, with its large and entrenched user base, hasn’t been immune from the gloomy sentiment.
Shares of Microsoft are down roughly 11% so far this year.
“While our checks point to ongoing Copilot product improvement, investors are increasingly focused on tangible adoption momentum,” Thill wrote of Microsoft’s AI assistant.
That’s not to say that Microsoft will be able to totally shake the cloud narrative. But perhaps investors have been thinking about the mismatch between AI capital expenditures and cloud growth all wrong, one analyst suggested.
“There is a timing delay between the capex investment and the capacity being available to drive revenue growth, and investors are not taking that into account,” Bernstein’s Mark Moerdler wrote recently. He thinks Azure growth may have accelerated in the March quarter and “could be as strong, if not stronger,” in the June quarter.
Analysts tracked by FactSet, however, are expecting Azure revenue growth of roughly 38% in constant currency for the March quarter — flat with the growth rate seen in the December quarter. The growth rate could fall to 37% in the June quarter, according to the consensus view.
The FactSet consensus calls for $4.05 in adjusted earnings per share for the period, up from $3.46 in the prior-year period. Analysts are looking for $81.4 billion in overall revenue, up 16% from the year before.
