Microsoft Earnings Spotlight on AI Demand Trends
Wall Street is gearing up to scrutinize Microsoft's upcoming earnings report on April 25, as the tech giant is expected to showcase its financial resilience and strategic advancements, notably in the artificial intelligence (AI) sector. Amidst evolving market dynamics, Microsoft is predicted to announce earnings per share (EPS) of $2.83 and revenue of $60.77 billion, marking a significant focal point for investors and analysts alike.
Bank of America analysts anticipate a promising 1% increase above their third-quarter revenue estimate of $60.5 billion for Microsoft, translating to a 14.5% year-over-year growth, or 14% on a constant currency basis. This robust projection, excluding Activision, underscores a growth rate of 11% year-over-year in constant currency, propelled by the enduring strength of Azure and M365.
"We expect 1% upside to our estimate for Azure growth of 28.0% cc, given positive system integrator partner feedback suggesting stable, healthy migration of new workloads to the cloud platform; relative strength in the Microsoft security stack; and ramping usage of Azure AI and data services such as Open AI Services, Azure AI, and Fabric," stated the analysts.
The spotlight on Microsoft intensifies as BofA suggests that the company's next growth catalyst will likely emanate from significant AI-related product advancements, including increased M365 Copilot users or rising Commercial Office ASP. Despite trading at 37 times projected 2025 free cash flow, the outlook for Microsoft’s valuation remains optimistic, buoyed by the expanding AI market, projected to reach $944 billion by 2027.
“The stock should then compound at the FCF growth rate that is accelerating toward low 20s, with incremental contribution from AI in the coming quarters,” they prognosticated.
Evercore ISI analysts, echoing a similar sentiment, are modeling Azure's growth at 28% in constant currency but see room for even greater expansion as AI-driven consumption heightens. Achieving a 30% growth rate for Azure appears within reach, bolstered by strategic incremental investments.
“We think anything in the 29-30% range is good enough and a 30%+ result is decidedly positive even with MSFT being a crowded long. There will be a lot of focus on the AI impact on Azure and any sense if the non-AI consumption business is stabilizing,” stated Evercore analysts.
Citi Research further validates the bullish outlook on Microsoft, especially leading into the Q3 earnings report, driven by strengthening Azure growth trends significantly influenced by AI services. The consensus underlines Microsoft's potential to surpass expectations across key performance indicators (KPIs), bolstered by Azure's reacceleration and continued cost discipline contributing to strong EPS upside. Notably, Microsoft stock has outperformed the broader market with a 9.5% gain in 2024.
As Microsoft strides confidently into its earnings announcement, the financial community remains eagle-eyed, keen to decipher the broader implications of its financial health and strategic pivot towards artificial intelligence, setting the tone for future growth trajectories in the tech realm.
Analyst comment
Positive news: Microsoft is expected to showcase financial resilience and advancements in the AI sector in its upcoming earnings report, with projected revenue growth of 14.5% YoY. Analysts anticipate positive growth in Azure and M365, and predict that AI-related product advancements will be a growth catalyst. The expanding AI market is also seen as a positive factor for Microsoft’s valuation.
