Microsoft’s Lead in Azure Powered by OpenAI

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Earlier this week, Microsoft (Nasdaq: MSFT) announced its third quarter results that surpassed market expectations. The company continues to bank on its AI investments.

Microsoft’s Financials

Microsoft’s revenues grew 7% to $52.9 billion, ahead of the market’s forecast of $51.1 billion. Adjusted EPS of $2.45 was also better than the estimated $2.23 for the quarter.

For the quarter, revenues from the Intelligent Cloud segment that includes Azure grew 16% to $22.1 billion, ahead of the market’s estimate of $21.9 billion. Azure sales grew 27% over the year, falling short of the 31% growth reported a quarter ago, but ahead of the 26.5% growth estimated for the quarter.

Revenue from the Productivity & Business Solutions segment, which includes cloud software assets such as LinkedIn, grew 11% to $17.5 billion, ahead of the market’s forecast of $17.05 billion. Revenue from the More Personal Computing segment, which includes Windows, Xbox and Surface, fell 9% to $13.3 billion, ahead of the market’s forecast of $12.25 billion.

Commercial Cloud business grew 13% over the year. Server products and cloud services revenue increased 17% driven by Azure and other cloud services revenue growth of 27%.

For the fourth quarter, Microsoft forecast revenue of $54.85-$55.85 billion, ahead of the $54.84 billion analyst estimate.

Microsoft’s AI Growth

Microsoft continues its investment within the AI space. Last quarter, it had announced plans to invest $10 billion in OpenAI for the deployment and development of specialized supercomputing systems, accelerating independent AI research. Continuing with the initiative, it recently announced the launch of a new AI-powered Bing Search engine and Edge browser.

The AI-based Bing engine can now help users make more informed decisions. For instance, users can ask it to plan a trip based on their inputs, and Bing can also help them figure out how much that trip will cost. Initially being launched as a preview version, the full version will be made available to millions of people in the coming weeks. Microsoft also plans a mobile version of Bing. The initial launch was received positively but for the the creepy conversation that was held between New York Times columnist Kevin Rose and Sydney, Bing’s ChatGPT avatar.

Last month, Microsoft showcased the use case of OpenAI beyond Bing and Edge into business apps, Word, PowerPoint, and Excel. Named as Copilot, the technology will help save time for users by offering drafting and editing capabilities. Business leaders will be able to create emails and send business proposals using the new tools. Copilot will be able to scan and take actions based on all the data from the Microsoft Graph, which stores content such as emails, file meetings, chats, and calendar notes. Currently, Copilot is being tested with a smaller group of users to monitor the tool to avoid the issues with Bing.

As of earlier this week, Microsoft has reported having more than 2,500 customers utilizing Azure to access?OpenAI’s services. Microsoft previewed OpenAI to Azure customers in a program called the Azure OpenAI service. Azure OpenAI Service will allow developers to integrate custom AI-powered experiences directly into their own applications such as enhancing existing bots to handle unexpected questions, recapping call center conversations to enable faster customer support resolutions, and more such use cases.

On the recent earnings call, Microsoft forecast a revenue growth rate of 26%-27% in the upcoming quarter at its cloud division Azure. It expects AI services to contribute approximately one point to the growth. Analysts believe that on Microsoft’s move in the AI landscape is already delivering tangible financial gains and will continue to help it grow in the coming months.

Meanwhile, its stock is trading at 304.83 with a market capitalization of $2.26 trillion. It hit a 52-week high of $303.65 this week after its results. It had fallen to a 52-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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