MSFT: Azure Open a New Door!
Specifically, Azure’s growth in FQ1 2024 underscores benefits from incremental AI infrastructure demand. The revenue stream grew 29% y/y in the fiscal first quarter, reaccelerating sequentially following several consecutive quarters of deceleration observed in the broader cloud-computing industry. Management has attributed much of the business’ outperformance during the quarter to robust adoption momentum for AI-related opportunities such as demand for Azure OpenAI Services. This continues to highlight the company’s competitive advantage in capturing the surging volume of dollars flowing into the development and deployment of AI applications amidst broader enterprise digital transformation trends since the sensational debut of OpenAI’s ChatGPT last year.
Azure OpenAI Services already support “AI-powered workloads” from more than 11,000 customers, with relevant revenue gradually representing a greater mix of total Azure and other cloud services sales generated during the fiscal first quarter. This is consistent with management’s previous expectations for at least a two-point contribution in Azure growth from the provision of AI-related services, up from the one-point contribution observed during the June quarter. Progress is also evident in the substantial outperformance of Intelligent Cloud segment revenue in the fiscal first quarter, which outperformed the upper range of the previous growth guidance by three percentage points at 19% y/y.
Based on our back of the napkin calculations, one point of growth at Azure represents about $500 million in annual recurring revenue. A recent court filing by Microsoft in relation to its proposed Activision Blizzard acquisition revealed $34 billion in fiscal 2022 Azure revenue, which translates to about $45 billion in fiscal 2023 based on the cloud unit’s blended annual growth of about 34% y/y during the period. Considering estimated growth in the minimum 20% range for Azure in fiscal 2024, one percentage point would represent about $500+ million. Thus kicking off the fiscal first quarter with a two-point contribution from Azure AI services effectively catapults the opportunity to the billion-dollar ARR club at just the early innings of AI adoption, underscoring the massive scale of Microsoft’s monetization opportunity on top of AI-related revenue from non-compute verticals.
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
