All Eyes Are on Microsoft’s AI Bet

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Earlier this week, Microsoft (Nasdaq: MSFT) announced its fourth quarter results that continued to outpace market expectations. But a weak outlook failed to impress the market, and the stock fell 3% in the after-hours trading session.

Microsoft’s Financials

Microsoft’s revenues grew 10% to $56.2 billion, significantly ahead of the market’s forecast of $55.47 billion. It ended the quarter with a net income of $20.1 billion, or $2.69 per share, which was also ahead of the Street’s forecast of $2.55 per share.

For the quarter, revenues from the Intelligent Cloud segment that includes Azure grew 17% to $24 billion. The market was looking for revenues of $23.79 billion from the segment. Azure sales grew 27% over the year. Productivity & Business Solutions revenues that include cloud software assets such as LinkedIn saw revenues grow 15.3% to $18.3 billion, again ahead of the analyst predictions of $18.06 billion. More Personal Computing that includes Windows, Xbox and Surface revenues fell from $14.5 billion last year to?$13.9 billion and?was ahead of the Street’s forecast of $13.58 billion.

For the fiscal year, Microsoft reported revenue of $211.9 billion, up 11% and a net income of $9.81 per share.

The company is looking for $53.8-$54.8 billion in revenues for the first quarter, which fell short of the $54.94 billion analyst estimate.

Investors are also eager for the outcome of Microsoft’s arrangement to buy Activision Blizzard. Recently, an appeals court denied the FTC’s motion to stop the transaction.

Microsoft’s AI Focus

While it is still early days, the market is waiting on Microsoft’s AI bets to pay off. During the quarter, Microsoft continued to expand on its alliance with OpenAI. It has?already launched a new AI-powered Bing Search engine and Edge browser, ?and continues to add the technology to sales and marketing software, GitHub coding tools, Microsoft 365 productivity bundle, and Azure cloud. Analysts believe that?Microsoft could add up to as much as $30 billion in new annual revenue for Microsoft , with roughly half coming from Azure.

Microsoft’s Azure OpenAI Service that companies can use to access language models and other developer tools now has over 11,000 customers, up from over 4,500 in May. Microsoft believes that it will see the impact of higher revenue in the second half of the 2024 fiscal year from these AI initiatives.

While the market is still small, Microsoft has become the leader in selling cloud-based AI services. It continued to drive that focus and recently tied up with Meta. As part of the alliance, Microsoft has become Meta’s partner for the release of Meta’s new Meta large language model (LLM), called Llama 2. Llama2 will be distributed by Microsoft through its Azure cloud service and will run on the Windows operating system. Microsoft believes that the partnership will?give developers a choice in the types of models they use and would help expand its position as the go-to cloud platform for AI work.

Microsoft has not said when the Copilot assistant for its Microsoft 365 productivity applications will become available for any customer to buy. Those capabilities will cost $30 per person per month in addition to existing subscriptions to Microsoft 365, the company said last week. Even with strong demand and a leadership position, the company expects growth from its AI services to be gradual as Azure AI scales and Copilots reach general availability dates.

Recently, Microsoft announced the expansion of its partnership with KPMG that will enhance KPMG client engagements, as well as supercharge the employee experience. The Microsoft cloud and Azure OpenAI Service capabilities will work to empower KPMG’s global workforce to help clients keep pace with the evolving AI landscape and solve business challenges while continuing to prepare them for future success. KPMG professionals will pilot the technologies with groups globally, combining the new capabilities with experience, insights, and sector expertise to enhance client engagements and accelerate digital solution development.

Its stock is trading at $330.72 with a market capitalization of $2.46 trillion. It had climbed to a 52-week high of $366.78 earlier this month. It hita52-week low of $213.43 in October last year.

Disclosure:?All investors should make their own assessments based on their own research, informed interpretations, and risk appetite. This article expresses my own opinions based on my own research of product-market fit, channel execution, and other factors. My primary interest is in product strategy. While this may have bearing on stock movements, my writings tend to focus on long-term implications. The information presented is illustrative and educational, but should not be regarded as a complete analysis nor recommendation to buy or sell the securities mentioned herein. I am not a registered investment adviser and I am not receiving compensation for this article.

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