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Microsoft's Earnings May Have Offered a Big Bullish Clue About Cloud Growth

January 31, 2024
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Microsoft Corporation's anticipated Azure revenue growth for this quarter, similar to the previous quarter, might not be the most significant aspect to focus on, according to Bernstein analyst Mark Moerdler. Instead, he directs investors' attention to Microsoft's capital-expenditure forecast, indicating a substantial sequential increase. This growth is attributed to investments in cloud and artificial-intelligence (AI) infrastructure.

Moerdler interprets this capital-expenditure forecast as a signal that Microsoft foresees a substantial uptick in cloud revenue. Additionally, he suggests that Microsoft has taken a leading role in the AI landscape, potentially positioning Azure as the preeminent hyperscaler provider.

Moerdler emphasizes Microsoft's unique position in the AI race, noting that the company's suite of software and cloud offerings sets it apart. He highlights Microsoft's powerful feedback cycle, wherein insights and innovations from applications, including numerous Copilots, drive progress on the Azure AI side of the business. Simultaneously, Microsoft learns from clients' needs and technological requirements, enhancing their ability to innovate and execute generative AI applications.

Rating the stock as "outperform," Moerdler raises his price target from $406 to $465. Following this analysis, Microsoft's shares saw a 1% increase shortly after the market opened on Wednesday.

During Microsoft's earnings call, it was revealed that AI contributed 6 points to Azure's growth in the latest quarter, up from 3 points in the prior quarter. Wolfe Research analyst Alex Zukin notes that investors seemed focused on Azure's non-AI segment slowing its growth. However, Zukin sees this as a positive, asserting that the core product is AI. If customers choose to spend Azure credits on Azure OpenAI Services rather than migrating legacy workloads to the cloud, Zukin views this as a feature, not a drawback.

Zukin anticipates that these customers will eventually migrate their legacy workloads to the cloud as the overall economic situation improves. He also appreciates management's commentary regarding the prevalence of inference-based workloads in AI, considering them more durable than training-based workloads. Zukin maintains an "outperform" rating and increases his price target from $480 to $510 in his latest report.

J.P. Morgan analyst Mark Murphy echoes the positive sentiments, viewing Microsoft's fiscal second quarter as healthy. He sees AI as a secular tailwind that will continue to grow over time. While some investors may have hoped for more optimistic macro commentary, Murphy appreciates Microsoft's clarity of vision, consistent execution, early leadership in generative AI, and cost discipline contributing to a solid margin increase for fiscal 2024.

With an "overweight" rating, Murphy raises his target price from $385 to $440, underscoring Microsoft's strong position in the evolving landscape of cloud and AI technologies.

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