The big winner in the AI craze! Microsoft's performance explodes: demand for cloud services is booming and revenue shows double-digit growth
Microsoft achieved its strongest revenue growth in six quarters, and core performance data crushed market expectations across the board.
According to Zhitong Finance, the American technology giant Microsoft (MSFT.US) announced its first quarter results for the fiscal year 2024 as of September 30 in the morning of October 25. Financial report data showed that Microsoft achieved its strongest operating results in six quarters. Revenue growth rate, core performance data crushed market expectations across the board. As global technology companies compete to deploy generative AI products, major companies around the world have extremely strong demand for their core "cash cow" business-Azure cloud computing services, thus significantly boosting overall revenue. The current market has a strong demand for innovative products such as ChatGPT. Booming demand for artificial intelligence products has prompted Microsoft's enterprise customers to redirect their spending patterns.
In the first fiscal quarter as of September 30, **Microsoft's total revenue increased by 13% to US$56.5 billion, significantly exceeding analysts' average expectations (about US$54.5 billion), and **earnings per share reached 2.99 US dollar, also far exceeded analysts' average forecast of US$2.65. Microsoft's Azure cloud service revenue growth reached 29%, compared with 26% in the previous quarter. This 29% growth rate is higher than the 25% to 26% growth guidance provided by Microsoft, and is also higher than analysts' average growth forecast. 26% faster. After the financial report was released, Microsoft's stock price rose by more than 6% in after-hours trading on U.S. stocks.
Microsoft Chief Financial Officer Amy Hood said on the latest earnings call that the company expects Azure cloud business revenue to grow 26% or 27% year-over-year in the quarter ending in December, after adjusting for currency effects. The chief financial officer emphasized that in the second half of Microsoft's fiscal year, the growth rate of Azure cloud services will be "roughly stable" and will show the increasing impact of generative AI technology.
Data compiled by the agency show that analysts generally expect Microsoft's total fiscal year revenue growth to rebound in the next few years, especially after a slowdown in fiscal 2023, and subsequent revenue will return to double-digit growth. .
Strong demand for Azure and Office series products helps Microsoft's performance take off
As the world gradually enters the AI era, the revenue of Microsoft's two core businesses - the intelligent cloud business centered on Azure cloud services, and the productivity and business process business centered on the Office series products have not been as expected by the market. Instead, it has achieved accelerated growth due to the global AI boom. The revenue growth rate brought by its "cash cow" business Azure cloud service is close to 30%.
"If we see Azure cloud revenue gradually stabilize, then the market optimism for Microsoft will return," said Dan Morgan, senior portfolio manager at Synovus Trust Co. "Enterprise software in the technology space may be the best investment right now. One area where Microsoft does look pretty strong."
The company reported commercial sales that were in line with market expectations, and a more stable PC market also helped boost revenue. "The company's execution exceeded expectations, the PC market turned positive, and cloud computing data also appeared optimistic." Hood said in explaining why the overall quarterly revenue far exceeded the forecast data she provided in July.
Detailed financial report data shows that the “intelligent cloud business”, including Azure, GitHub, server products, enterprise and cloud services, had revenue of approximately US$24.3 billion in the first fiscal quarter ending in September, a year-on-year increase of approximately 19%. That beat analysts’ consensus estimate of $23.61 billion. Among them, the revenue growth rate brought by Azure cloud services reached 29%, exceeding the 26% expected by analysts.
**Microsoft Azure Cloud, Amazon's AWS, and Google's Google Cloud Platform are all major cloud computing service providers in the world. They provide one-stop cloud service deployment from IaaS, PaaS to SaaS. **Their users can choose to deploy applications on the provided cloud infrastructure, or use the hosted cloud platform to develop and run applications such as generative AI. These companies have established vast data center networks around the world, allowing users to choose the data center closest to their region to host and process their data and applications.
The vigorous development of the field of generative artificial intelligence requires the support of powerful cloud computing capabilities, so the demand for Microsoft cloud computing services from global enterprises has become increasingly strong. Recently, Microsoft's cloud service revenue has returned to the growth curve, which largely indicates that the veteran technology giant's cloud computing-related services are benefiting from the explosive growth in demand for cloud computing services brought about by the craze of global enterprises deploying artificial intelligence (AI). .
In addition, the "productivity and business process" business revenue, including the Office series products, LinkedIn, Dynamics and other products and services for corporate customers and personal consumers, reached approximately 18.6 billion US dollars, a year-on-year increase of approximately 13%, which analysts generally expected It was US$18.3 billion.
Microsoft is trying to embed OpenAI's ChatGPT into the Office series products to improve user work efficiency . Microsoft's new AI assistant "Microsoft Copilot" will be launched with the new version of Windows 11 starting from September 26 and become a personal user assistant. The new AI assistant in Windows 11, Microsoft 365 (including personal consumer Office products), Edge and Bing search engines is part of the Microsoft 365 subscription service for individual users, so it has largely attracted those who favor AI technology to improve work efficiency. individual consumers.
Revenue from the "More Personal Computing" business, including Windows systems, search engines, game consoles Xbox and Surface PCs, reached approximately US$13.7 billion, achieving a year-on-year growth of 3%, rather than the year-on-year decline expected by the market before the financial report was announced. Analysts on average expected about $12.9 billion.
Microsoft 365 Copilot is about to come out, and "AI revenue generation" may become Microsoft's new engine
Microsoft CEO Satya Nadella is transforming Microsoft's entire product suite, including Office, Windows, search engines and security software, to add features based on the OpenAI core large model. Microsoft, which holds a stake in OpenAI, It is trying to embed generative AI technology into its core products. This key partnership helps Microsoft attract enterprise customers keen to use ChatGPT and other new AI technologies in their applications. These new technologies can quickly respond to user questions and generate content.
The veteran U.S. technology giant has invested more than $10 billion in startup OpenAI, a partnership that puts the 48-year-old software developer at the forefront of the technology industry in the race to develop new applications based on AI technology. Programs allow customers to generate new content from their own data and information scraped from the web. Although Microsoft has made widespread layoffs, the company is still investing heavily in the data centers and chips needed for its huge artificial intelligence projects.
Microsoft, which counts most of the world's businesses as customers of its productivity tools and operating systems, is currently testing a more expensive version of its Office software based on generative AI technology. As Microsoft executives previously said on the earnings call: "We are now rolling out Microsoft 365 Copilot to approximately 600 paying enterprise customers through our early access program, with feedback from organizations such as Emirates, General Motors, Goodyear and Lumen. : It changes employee productivity.”
Starting from November 1, 2023, Microsoft 365 Copilot Enterprise Edition will be fully launched to enterprise customers. Copilot, an AI tool, will enter collaboration tools such as Word, Excel, PowerPoint, Outlook, and Teams to improve work efficiency. For example, Copilot can be used in Summarize and better organize user ideas in Word documents, automatically and accurately generate titles or cover images based on the text given by the user, and directly embed them into the user's creation. Microsoft 365 Copilot Enterprise Edition can also extract users' corporate data to help write Word documents, emails, plan events, etc.
In terms of pricing, based on the existing Microsoft 365 subscription fee, the Microsoft 365 Copilot enterprise version with new AI capabilities is priced at an additional US$30 per user per month.
Citigroup said that the pace of expansion of Microsoft's Azure cloud business may accelerate, and the general availability of Microsoft 365 Copilot is the most critical point for Microsoft's stock price to focus on, especially when customer survey results show that "early adoption trends are very strong." Down. Dan Ives, an analyst from Wedbush, predicts that more than half of Microsoft's users will use Copilot within the next three years. "We believe that although management has talked about a 'gradual ramp-up' of AI monetization in fiscal 2024, based on our recent surveys, AI adoption has been faster than expected so far," Dan Ives said.
Analysts at Citigroup say Microsoft's Copilot has huge revenue potential. The agency estimates that even if the penetration rate is only 5%, the product can bring at least US$5 billion in incremental revenue to the Office series products, nearly half of the Office 365 enterprise revenue scale in the third fiscal quarter (approximately US$9.4 billion).
In an effort to boost ad sales and capture more market share from Alphabet's Google (GOOGL), Microsoft has embedded OpenAI's ChatGPT technology into its Bing search engine. Data shows that Microsoft's search and news advertising sales increased by 10% quarterly through September. Microsoft has also begun previewing AI-based security-type software to customers and said many customers are signing up for its Azure cloud service, which includes OpenAI tools. It is understood that the Azure OpenAI service currently has 18,000 customers, up from 11,000 in the previous quarter.
Before the announcement of the financial report, it has been favored by Wall Street banks. Is Microsoft's stock price expected to reach a new high?
In the three months to September, the stock fell by more than 7%, which was greater than the 3.6% decline of the S&P 500 index during the same period. However, Wall Street still favors Microsoft very much and is optimistic about the hot demand for cloud services under the AI boom and the prospects of AI revenue generation. Boosted Microsoft stock price trend.
Microsoft Chief Financial Officer Hood said at the Communacopia + Technology conference hosted by Goldman Sachs Group last month: "Businesses related to generative artificial intelligence are very likely to be the fastest business we can build to reach 10 billion US dollars."
It is understood that **before Microsoft released its financial report, Citi analyst Tyler Radke reiterated Microsoft's "buy" rating and raised the target price from US$420 to US$430. Citi expects Microsoft's total revenue and overall profitability to accelerate expansion, helped by stable IT budgets and strong revenue growth related to generative artificial intelligence. ** The Wall Street bank last month launched an active watch on catalysts for Microsoft's stock price and said the watch remains open. Citigroup said Microsoft remains its preferred large-cap investment target in the software sector of the U.S. stock market.
Last month, the only institution with a "sell" rating on Microsoft (MSFT.US) officially capitulated. Guggenheim, a well-known asset management institution, said that Microsoft's strength in generating artificial intelligence is expected to boost its stock price, thereby improving its rating on the company. The agency's analyst John DiFucci raised his rating on Microsoft from "sell" to "neutral", which also means that Microsoft got rid of the only "sell" rating, noting that the company's expectations around generative artificial intelligence are "too much." Positive, it’s hard to counter this positive trend”.
Wall Street analysts' consensus ratings and target prices compiled by Seeking Alpha show that Wall Street analysts' consensus rating for Microsoft is "Buy", and the average target price is expected to reach a record high of $394.71, indicating potential upside in the next 12 months. The space is close to 15%.