The Microsoft Earnings Report Was Solid, and Here's Why They'll Be Even Better in the Future

Melius Research analyst Ben Reitzes regarded Microsoft Corp.’s earnings as commendable across multiple fronts and foresees significant improvement ahead for several reasons, as outlined in a note published on Friday.

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Firstly, he pointed out that the company's Azure cloud-computing division has not yet had adequate capacity to meet the surging demand for artificial intelligence services. Moreover, Microsoft has just begun to realize the financial advantages of its Copilot AI software functionalities.

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In the previous quarter, Microsoft grew its Azure business by 31%, with AI contributing 7% to this growth, a slight increase from the 6% contribution in the December quarter. Reitzes suggested that given the current capacity limitations, the contributions from AI could have been even higher.

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He emphasized the growth trajectory aligns with what he terms the 'AI Gold Rush,' evidenced by significant capital expenditure figures and spending projections from major cloud providers. Among these, Microsoft appears to have a competitive edge due to its rapid growth on a substantial revenue base, effectively managing various constraints.

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Reitzes also underscored the potential of Microsoft's Copilot offerings, which enhance the utility of various software products through AI assistance. Looking forward to 2025, he anticipates Copilot to make substantial contributions, not only potentially leading to pricing advantages but also positioning Microsoft as a necessary interface for external AI assistants. He maintains a buy rating on the stock with a target price of $475.

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Mark Moerdler of Bernstein observed from Microsoft’s earnings call that AI is increasingly becoming integral to the company’s operations. He highlighted Microsoft's strategic positioning at the forefront of the generative AI innovation cycle, boasting the most comprehensive AI technology stack, tools, and supercomputing capacity to drive Azure AI.

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Moerdler was not only impressed by Microsoft's financial performance but also by the management’s enthusiasm regarding the company's present and future prospects. He rates the stock as outperform with an updated target of $489, up from $465.

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Kirk Materne of Evercore ISI likened Microsoft to a "supertanker" in the AI and cloud computing realm. Despite facing challenges such as small-business headwinds and capacity constraints for AI services, Materne believes Microsoft is well-positioned for the remainder of the year.

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He anticipates Copilot for Office 365 to significantly enhance average revenue per user in the latter half of the year, while Azure is expected to maintain its strong position in gaining market share. Materne maintains an outperform rating on the stock with a revised target price of $485, up from $475.

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Following these analyses, Microsoft shares concluded Friday trading with a 1.8% increase.

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