Microsoft's AI Growth Faces Scrutiny Amid Investor Expectations
Microsoft set to reveal slowest quarterly revenue growth in a year. Concerns arise over AI demand and returns on hefty technology investments. Azure cloud-computing unit expected to have grown by 33% in fiscal first quarter.
The tech giant is viewed as a frontrunner in leveraging generative AI, partly due to its stake in OpenAI, the owner of ChatGPT. However, recent reports suggest sluggish adoption rates for key products, such as the US$30-per-month Copilot assistant tailored for enterprises.
Morgan Stanley analysts have highlighted a sense of apprehension surrounding Microsoft's upcoming earnings, citing concerns about escalating capital expenditures, shrinking margins, the absence of clear evidence on AI returns, and complexities following a financial resegmentation. The upcoming results mark the first since the company revamped its reporting structure in August to better align with its operational management, making it more challenging to gauge the previous quarter's performance accurately.
Despite the stock only edging up by approximately 1% since the last earnings report in late July, lagging behind the S&P 500 index, Microsoft's shares have seen a 14% increase over the year. Analysts predict that Microsoft's Azure cloud-computing division likely expanded by 33% in the fiscal first quarter ending on September 30, aligning with company projections but slightly lower than the previous quarter. Although AI's contribution to Azure growth has increased, accounting for 11 percentage points in the fourth quarter, the overall business growth has decelerated.
Microsoft's total revenue is forecasted to have climbed by 14.1% to US$64.51 billion in the September quarter, as per analysts surveyed by LSEG. The company, along with its AI competitors, has cautioned that investments in AI technology will remain substantial. Capital spending in the September quarter is estimated to have surged by 71.7% to US$19.23 billion, according to Visible Alpha. However, the Copilot assistant has not gained the traction Microsoft had anticipated.
A survey conducted by research firm Gartner in August revealed that the majority of 152 information technology companies had not progressed beyond the pilot stage with their Copilot initiatives. Despite investor skepticism regarding Copilot adoption, some analysts believe that Microsoft's recent advancements, such as the capability to create autonomous AI agents with Copilot's assistance, could drive increased adoption of the assistant.
Analyst Ben Reitzes from Melius Research noted that while most investors appear doubtful about 365 Copilot adoption due to limited personal usage, there are signs of improvement in Copilot data points, with an expanding customer base. Microsoft's productivity and business processes unit, which encompasses Office products, LinkedIn, and 365 Copilot, is expected to report steady quarter-on-quarter growth of 12%, according to Bernstein's Mark Moerdler, a top-rated analyst for the company.
Moerdler also estimated that revenue in the intelligent cloud segment, housing Azure, likely grew by 20%, mirroring the previous quarter's pace. Additionally, growth in the more personal computing unit, including Windows and gaming, is anticipated to have picked up as the PC market stabilised.
Microsoft set to reveal slowest quarterly revenue growth in a year
Concerns arise over AI demand and returns on hefty technology investments
Azure cloud-computing unit expected to have grown by 33% in fiscal first quarter
Source: REUTERS