Microsoft Expects AI Revenue Growth As Shares Surge

Microsoft expected to see strong revenue growth amidst strong AI adoption, but Azure sees flat margins on infrastructure investment

Microsoft is expected to post strong year-on-year quarterly revenue gains of 15 percent, according to analysts, its best growth in nearly two years, as its own products with integrated generative AI fuel demand for its Azure cloud services.

A consensus of analysts projected revenues at Microsoft of $61 billion (£48bn) for the quarter, up from $53bn for the same period a year ago.

Microsoft again surpassed Apple by market value on Friday, edging to just over a $3tn market capitalisation as Apple, the most valuable company since 2011, dipped below that mark.

Last January Microsoft kicked off a huge wave of investment in AI with a deal to invest more than $10bn into OpenAI, the developer of ChatGPT.

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AI revenues

The company’s fiscal second-quarter results up to December 2023 on Tuesday kick off results from other major tech firms in the coming days, including Apple, Meta, Amazon, Alphabet, Nvidia and Tesla, with investors particularly looking to see which firms will benefit the most from AI after billions were poured into the technology last year.

Morgan Stanley analyst Keith Weiss said earlier this month that while investors may not see strong returns on AI at Microsoft in the December quarter, the technology’s contributions would become apparent by the end of the year.

He said a survey of chief investment officers by Morgan Stanley found that 68 percent plan to adopt Microsoft’s generative AI systems at some point in the next year.

“Gen AI has emerged as the top priority for (chief information officers) and Microsoft is uniquely well positioned, with the majority of CIOs expecting to use a Microsoft AI product in the next 12 months,” he wrote.

Azure expenses surge

Jeffries analyst Brent Thill said in a research notes that AI’s contribution to Azure growth was expected to increase, with indications of “strong demand for Azure AI services”.

He said recent turmoil at OpenAI, where chief executive Sam Altman was unceremoniously fired and then rehired a few days later, would have a “minimal impact, if any” on the AI contribution to Azure for the quarter.

Microsoft forecast 26 percent to 27 percent growth for its Azure cloud unit for the quarter.

But Azure gross margins are expected to be mostly flat for the quarter due to a surge in operating expenses as the company invests in expanding AI infrastructure.

A PC market recovery is expected to show the biggest revenue growth in four years at the Windows and devices business.

Layoffs follow Activision buy

Microsoft forecast the Windows business segment, which includes recently acquired Activision, would see quarterly growth of about 16 percent to 19 percent year-on-year.

The company said last week it would lay off 1,900 staff at Activision Blizzard and Xbox, about 8 percent of the Microsoft Gaming division, amidst broader layoffs in the gaming industry that followed unsustainable growth during Covid-19 lockdowns.

Microsoft’s shares grew 57 percent last year amidst investor enthusiasm for AI-related stocks that, along with gains at Alphabet, Nvidia and a few others, fuelled a 26 percent rise in the S&P 500 index.

Apple, Microsoft, Meta, Amazon, Alphabet, Nvidia and Tesla accounted for 62 percent of the index’s total returns for 2023 as the S&P continued to rally on AI fervor to close at an all-time high on Friday.