Earnings preview: Azure growth forecast will be the most important bit of news released when Microsoft reveals fiscal third-quarter results, though executives will likely focus on path for artificial-intelligence efforts
Expect Microsoft Corp. executives to discuss artificial intelligence a lot when they reveal recent financial results Tuesday afternoon, but the more important disclosure will be tucked away.
Microsoft (MSFT) has received a lot of buzz for incorporating ChatGPT into its products after another big-money investment into the generative AI product’s parent company, OpenAI. While the long-term prospects for AI-influenced products has excited investors, Microsoft will likely take months or even years to show the effects of that effort.
The direction of Microsoft’s financial results in the near term will be decided by Azure, the company’s cloud-computing division, as the company’s personal-computer business suffers from lackluster demand for PCs and the cloud-software business runs into reticence to spend from large corporate customers. Most specifically, executives’ fiscal fourth-quarter forecast for Azure — which will be provided in a conference call Tuesday afternoon — will likely determine the course of the stock.
“Azure has become a far bigger business and delivered better margins than many believed just a few years ago, but the past few quarters have been a cause for concern for some investors, as Azure has seen significant deceleration,” Bernstein analysts wrote Monday, while maintaining an “outperform” rating and $322 price target on the stock. “Investors were expecting Azure to decelerate, due to the law of large numbers and macro conditions, but the recent deceleration has surprised many (including ourselves).”
Microsoft does not provide full financial information for Azure, despite its largest cloud rivals — Amazon.com Inc. (AMZN)and Google parent Alphabet Inc. (GOOGL)(GOOGL) — providing such information for their similar services. Instead, Microsoft offers a larger look at a segment it calls “Intelligent Cloud,” as well as revenue growth rates for Azure.
The Intelligent Cloud segment is expected to grow 14.8% year-over-year to $51.02 billion in the fiscal third-quarter results Microsoft is scheduled to release Tuesday, and 13.8% to $23.79 billion in the final three months of the company’s fiscal year, according to FactSet. Analysts on average expect Azure to report third-quarter growth of 26.2%, and are projecting fourth-quarter growth of 25.3%.
Those estimates have been dropping as analysts track a continuing decline, however. Azure growth for the fourth quarter was expected to be 35% a year ago, and has fallen from an average estimate of 25.8% since the end of March, according to FactSet records.
“Our checks point to continued elevated headwinds for Azure and Windows, and while we think this was appropriately modeled for [the March quarter], it could drive some modest risk to [June quarter estimates],” TD Cowen analysts wrote last week.
If Microsoft executives guide for fiscal fourth-quarter Azure growth lower than analysts’ estimates as the TD Cowen analysts expect — they foresee a guide in the 24% to 25% range — it could drive the stock lower. But those analysts, in the same note, still raised their price target on the stock to $300 from $285, arguing that the long-term AI thesis outweighs near-term pressure.
“We see continued elevated headwinds in Azure growth as a nearer-termoverhang on shares,” they wrote, but “comps will start to get easier as we enter the [June quarter] & its new AI releases (Bing, GitHub, M365) are bound to inject new growth opportunities & competitive differentiation in the medium-term.”
Microsoft stock has gained 2.8% in the past year, as the S&P 500 index has declined 3.2% and the Dow Jones Industrial Average — which counts Microsoft as a component — has not changed. Forty of the 49 analysts tracking the stock consider it the equivalent of a “buy,” according to FactSet, with eight “hold” ratings and a single “sell.” The average price target as of Monday afternoon was $298.47, according to FactSet.