Microsoft posts another set of bumper results. Market's response? Meh

Forecast worries or AI fatigue kicking in? Redmond has an important 12 months ahead

Microsoft's Q2 results failed to impress the markets yesterday, as the company's stock dropped despite some impressive numbers and the usual quantities of AI bluster.

The Redmond-HQ biz has invested heavily in AI in recent years - up to $13 billion in OpenAI alone via cloud credits, etc - and it is difficult to navigate Microsoft's product line-up without tripping over an implementation of the technology.

However, during questioning from analysts, Microsoft steered clear of giving details on the actual contribution the technology is making to its bottom line.

It is difficult to unpick something that is increasingly deeply integrated into the Microsoft's services, however it is also reasonable for investors to expect answers – especially considering the sums tipped into the AI pot.

There were some hints, aside from a selection of customer success stories. Microsoft said it now has 53,000 Azure AI customers, of which a third are new to Azure. During the conference call, Microsoft's chief financial officer, Amy Hood, noted a growth of 30 percent in Azure and other cloud services "including six points of growth from AI services." Not terrible, but not great either.

This is especially so when considering that the company's on-premises server business went up by three percent, driven primarily by the end of support for Windows Server 2012. And that AI revenue generation is growing from a relatively small base.

But all in all, Microsoft registered some healthy revenues. Overall, it recorded a $62 billion top line for the three months ended December 31, 2023, up 18 percent year-on-year. Intelligent Cloud – Azure and other cloud services – grew 20 percent to $25.9 billion while Productivity and Business Process – products like Office, LinkedIn, and Dynamics – recorded a 13 percent increase to $19.2 billion.

Revenue from devices dropped nine percent, but overall Personal Computing – which includes Windows and Xbox, among others – was up by 19 percent to $16.9 billion.

Operating profit for the quarter was $27 billion versus $20.39 billion in the corresponding prior year period.

Time to back up that valuation...

Microsoft's valuation has recently been driven to giddying heights, principally by the hype around AI technologies. Since March 2023, the stock price went up 65 percent.

However, Microsoft continues to make it difficult to understand the impact the investment is having. Execs might be quick to trumpet research showing a 70 percent improvement in productivity "using generative AI for specific work tasks", yet it remains unclear how many customers will pay the extra needed to bring Copilot into their subscriptions.

As CFO Hood observed, it is still early days. Perhaps too early. The Q2 turnover from sales came in above expectations, yet there was a sense of disappointment at Microsoft's forecast of revenues between $60 billion and $61 billion for the next quarter. Despite the generally impressive figures last night, the company's shares still took a very slight hit. After opening at just over $412, Microsoft's stock fell fractionally to $409.

As Microsoft noted during the earnings call, 2024 is shaping up to be a big year for the company when the investment in AI must start paying off - investors' patience may otherwise start to wear thin.

The impending arrival of AI PCs and even the Copilot key slated to appear on upcoming Windows keybords, were noted by Microsoft. However, this time next year, it will be considerably more difficult to dodge the question of AI revenues, particularly considering how much the company expects its customers to pay for Microsoft 365 Copilot.

Customers subscribing to M365 Personal or Family can access the Copilot Pro service for an extra $20 per user per month, and Microsoft 365 Business Premium and Business Standard can buy between one to 299 seats for an additional $30 per user per month.

As analysts at Gartner observed, the deployment of AI technologies is still in the planning stage for many companies. "In 2025, it will be the year to execute."

Therefore, Microsoft has a little while to go before it can declare that the AI bets have paid off. Or not. ®

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